Getting a mortgage can cause a great deal of anxiety for the first-time homebuyer. You'll have to have a good credit report and credit score to demonstrate your ability to pay back the loan. Additionally, your lender will calculate your personal debt-to-income ratio, examine all your sources of income and calculate your monthly expenses. Gaining knowledge of how the mortgage process works can help alleviate your stress levels.
Your debt-to-income ratio has more to do with getting a mortgage than any other financial calculation your lender will make. Essentially, this ratio is the total amount of your debt divided by your total income and expressed as a percent. If your debt-to-income ratio is more than 38 percent, your lender will have a difficult time getting the underwriter to approve your loan. To improve your debt-to-income ratio and improve your chances of getting a mortgage, you'll need to either reduce your debt or increase your income, or even do both.
Components of Debt
Lenders consider as debt any mortgages you have or are applying for, rent payments, car loans, student loans, any other loans you may have and credit card debt. For the purposes of calculating your debt-to-income ratio, insurance premiums for life insurance, health insurance and car insurance are not included. However, if you fall behind on your insurance payments, your credit score will be affected. Try to stay on top of your monthly payments for best results.
While car insurance is not included in the debt-to-income ratio, your lender will look at all your monthly living expenses to see if you can afford the added burden of a monthly mortgage payment. Thus, if you have a very expensive car that requires costly insurance, your lender may question you about this expense. These kinds of expenses can raise a red flag with the lender, who might be concerned that you aren't prudent about how you spend money and are therefore a credit risk.
One way you may be able to get approved for a mortgage even if you have a lot of debt is to make a larger down payment on the home you wish to buy. A larger down payment is a way of showing the lender you can afford the home. This strategy will also reduce your monthly payments and make the mortgage more affordable for you in the eyes of the lender.
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