Business

Lowering your debt-to-income ratio and why it matters

Debt

Having a reasonable debt-to-income ratio is important if you are considering buying a home. This is one of the many things lenders consider when you apply for a loan. Even a high income and an excellent credit score are not enough to qualify for a mortgage if you owe a significant amount compared to how much you make. Even if your debt-to-income ratio qualifies you for a mortgage, lowering it can provide benefits such as a lower interest rate. Given that it can take some time to pay down your balances, it makes sense to work on repayment before you start shopping for homes.

Consider Consolidating Student Loans

Consolidating existing student loans into a single loan can lower your monthly payment. You can also consolidate at a lower interest rate and prioritize repayment. Either of these options will make you more attractive to lenders. When considering a private student loan consolidation, look at the different options available. Find out what interest rate you will get on the consolidation and how long the repayment term is. While the amount of your monthly payment matters, it shouldn’t be your only concern.

Stop Using Your Credit Cards

If you are carrying any credit card debt, work on wiping that out before applying for a mortgage. It won’t disqualify you from a mortgage but can be a red flag to lenders. Some payments, such as student and auto loans, are an expected part of life. Credit card debt, particularly if it pushes up your monthly expenses significantly, indicates that you are living beyond your means. Start only spending what you have in the bank to cover. This can be a challenge if you are used to putting the occasional extra on your credit card between paychecks. It is much better to gain control of this bad habit now than when you are a homeowner and facing the unexpected expenses that go along with that. Aim to make more than the minimum payment on your cards to lower your balances as quickly as possible. If you trust your self-control, consider looking for a low or no interest offer on a balance transfer card. Doing so makes it easier to quickly pay off your balances.

Look at Other Debt

If you have an auto loan, a loan for health or veterinary care, or some other monthly payment, look at the balance and the amount of interest you pay. Is there any way to pay off some of this money before applying for a mortgage? You don’t have to be debt-free before buying, but the less you are repaying each month, the more comfortable the lender will be with offering you a loan. Balance repaying any of these loans with the need to save for a down payment. It can be a challenge to decide which makes the most economical sense. A higher down payment allows you to borrow without paying private mortgage insurance, but it means you are dedicating less money to debt repayment. This balancing act is one reason it is important to start planning well before you are ready to start shopping for a home.

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