Congratulations on deciding to become a homeowner. The cost of renting keeps going up. Why continue paying off someone else's mortgage when you could be investing in property of your own? One of the things lenders look at during the home loan process is how much debt you incur each month in relation to your income. This is called your debt-to-income ratio. Mortgage companies want to see that you can readily handle your debt load before they'll approve your home loan. What debt-to-income ratio should Havasu home buyers strive for?
Debt-to-Income Ratio and the Havasu Home Buyer
How to Calculate Your Debt-to-Income Ratio
Like your credit score, it's a good idea to know what your debt-to-income ratio is before you start the home buying process. Lenders look at your recurring monthly debt payments (credit card minimums, student loans, car loans, child support, etc.). Then, they add in what your projected monthly mortgage payment will be. After that, they compare that to your household's gross monthly income (before taxes).
For example, let's say that you and your spouse bring in $10,000 per month before taxes. Between your credit cards, car payments, and projected monthly mortgage payment, you spend about $3500 each month. Your debt-to-income ratio is 35% ($10,000 income / $3500 payments).
Keep in mind that lenders don't take into account insurance (car, health, life, etc.), food, utilities, entertainment or any other living expenses. And, that number is based on pre-tax dollars. Uncle Sam needs his share. In actuality, your net monthly income is lower than your gross. That $10,000 could be closer to $7500-$8000. So, you'll need to add that into your own personal equation to see if this fits with your lifestyle.
How High Can Your Ratio Go?
In today's Havasu real estate market, lenders suggest a maximum debt-to-income ratio of 43%. If your ratio comes in higher, lenders consider you to be a high risk borrower. Lower ratios qualify buyers for better interest rates, too. Ideally, financial experts suggest that your debt-to-income ratio should run no higher than 36%. If you keep it at or below 36%, you're in a much better position to receive approval for your mortgage loan.
To find out if this all fits with your current circumstances, I suggest that you consult with a financial advisor. They'll look over your entire financial situation to give you a realistic picture of what you can afford. When you're ready to start looking at Havasu homes, please contact me. I'd love to show you what's available right now.