So are you planning to buy a new house? Stop a moment and think about your income to debt ratio, which is most likely to affect the amount of money which can be secured from a lender. As a person plans to apply for a house loan, he needs to consider his personal finances. Most money lenders do not wish to finance a person who is already overloaded with other loan repayments.
Determining the total monthly income is important while planning to seek a home loan. This income will include all the recurring and regular income, which a person can document. If an earning cannot be documented, then it cannot be used to qualify for a property loan. If a person deals with stocks or real estate, income from such sources can be used for the calculation of the mortgage. A loan officer is happy to help his client by giving him proper information about all the rules, therefore they should be contacted.
Calculation of monthly debt load is also an essential factor. This debt includes all the monthly obligations such as car loan, credit cards, personal debts or any other responsibilities like alimony. In case of credit cards, the minimum periodic payments are considered whereas current payments are used to calculate the debt load in case of installment credits. By adding all this up, the monthly debt figure can be calculated.
A financing institute will never want a person to take up a loan which will overburden his ability to repay the money which he owns to different people. Below written is a rough idea of how lenders look at various figures before lending money.
A person’s monthly expense which includes his tax as well as insurance payments should not be more than 28% of his total monthly salary. 15% of the payments are considered to go towards insurance and tax expenses and the remainder money is to be used for the interest or principal repayments.
The income vs. debt ratio helps in determining whether a person qualifies for a loan or not and if yes, how can it be secured by him easily. Other factor like length of time in the job or credit score of a person also plays a major role, a good income vs. debt ratio gives a person extra advantage to negotiate with the financing institutes if all the other factors are not supporting him.
Credits scores of a person are always given more importance than this ratio but while securing a home loan or any other type of mortgage, a low debt to income ratio will always help you to qualify for a loan at low interest rate. This is a tool used by the financing institutes or banks to determine whether to lend a loan to the person or not.
Therefore the debt to income ratio is really important as it gives a true picture of a person’s financial status. This ration can be easily calculated by a person himself and can help him in securing a better mortgage. Hence it is important to keep the debt to income ratio low as it will always work in a person’s favor.
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