When you’re working toward buying a home, you want the financing process to go quickly and smoothly. One way to make that happen is to make sure you understand the terminology behind your mortgage—and how different aspects of your financial and credit history can impact your home loan process.
If you’re a first time home buyer, choosing the right Texas home lenders can help make the mortgage process a better experience for you! They can help you understand a concept known as the debt-to-income ratio (DTI) and how it affects your credit score and your ability to qualify for a mortgage.
The HomeSoon Lending Team is here to help! Let’s take a look at your debt-to-income ratio and learn why it’s important when going through the home loan application process.
What Is DTI?
The debt-to-income ratio is a ratio of how much debt you carry versus your income. If you have significant debt, your DTI ratio is high. Texas home lenders can deny a home loan if they feel that you carry more debt than your income can cover. Giving you a loan—on top of your current debt—puts them at risk of never recovering that money if they feel your DTI is too high.
However, with a low debt-to-income ratio, first time home buyers are excellent candidates to qualify for a home loan in Texas!
- Mortgage brokers look for a DTI of 20% or less.
- That tells them you have 80% of your income available to go towards your mortgage.
- This gives them confidence that you have room for a mortgage payment every month on top of other responsibilities.
A low debt-to-income ratio also instills confidence in lenders that you know how to handle your finances, manage your expenses, and keep your debt commitments under control. Entrusting you with a monthly mortgage payment is easy for most Texas home lenders when they see you have a low DTI.
What Contributes to Your DTI?
How can you calculate your debt-to-income ratio? It’s a simple calculation with a significant impact on how attractive you are to lenders.
- Calculate the total amount of your monthly bills: This includes routine bills, like car payments, electricity, and rent. Make sure also to factor credit card bills and any other debt.
- Divide that amount by your monthly gross income: This is the amount you earn every month before taxes are taken out.
The resulting percentage is your debt-to-income ratio. When reviewing these numbers, if your DTI is higher than 43%, most Texas home lenders could consider you too high of a risk for a home loan. Such a high debt-to-income ratio indicates that your monthly debt payments outweigh your income level. Adding a monthly mortgage payment to your debt load could overwhelm your ability to make payments on time each month.
How Can You Lower Your DTI?
If your DTI is too high to qualify for a home loan, or you find that lenders only offer a loan with high-interest rates, don’t give up! Your debt-to-income ratio is still manageable, and you’re in control.
It might take some time to adjust your DTI to a lower percentage, but it’s well worth the effort. With a more attractive DTI, you’ll have better mortgage offers from Texas home lenders with lower interest rates. You might also be able to afford “more” house!
Take Time to Regroup
Don’t settle for a home loan that increases your debt with high-interest rates and large monthly payments! That situation only puts you further into debt.
To lower your DTI:
- Stop spending: Evaluate your expenses and eliminate anything that doesn’t contribute to saving for your down payment or lower your debt. If you don’t need it right now, don’t buy it.
- Pay down your debt: Start with what you can pay off right away. Focus on car payments to eliminate that car loan from your debt. Choose one credit card and make payments until you have a zero balance.
- Reduce spending: Cook at home, take a year off from big purchases, and find ways to lower your energy bills. Spending less and saving money helps reduce your debt and makes more income available for a mortgage payment!
- Generate more income: If it’s possible, go for that promotion and earn the raise you deserve! Start a side hustle and put that income toward paying down your debt and saving for your new home.
Reducing spending might be easier than earning a raise, depending on your job situation in the wake of COVID-19. However, your combined efforts to improve your debt-to-income ratio can put you in a better position for an excellent loan when choosing a mortgage lender for your new home!
The Right Texas Home Lenders Can Help!
Finding the right Texas home lenders to help you navigate the mortgage path is a critical step to purchasing the home of your dreams. If you’re a first time home buyer, this is new (and sometimes scary) territory. That’s why the HomeSoon Lending Team is here to help you get home sooner.
Don’t let your debt-to-income ratio scare you: it doesn’t have to stay the same forever! Let the HomeSoon Lending Team help you work through the numbers and simplify the journey to your new home. We can talk about your unique needs, whether that means a lower down payment or a quicker home loan process. Learn more about the loan process with our free resource: the HomeSoon Lending Team’s Road Map to Mortgages!