Paying your bills on time, having stable income and a good credit score won’t get you a mortgage loan if your lender determines that you live too close to the edge. Knowing your debt to income ratio is just as important as knowing your credit score when you get ready to apply for a home loan. There are two types of debt-to-income ratios that lenders look at when you apply for a mortgage:
The front-end ratio, also called the housing ratio, shows what percentage of your income would go toward your housing expenses, including your monthly mortgage payment, real estate taxes, homeowner’s insurance and association dues. The back-end ratio shows what portion of your income is needed to cover all of your monthly debt obligations. This includes credit card bills, car loans, child support, student loans and any other debt that shows on your credit report that requires monthly payments, plus your mortgage payments and other housing expenses.
If your debt to income ratio is too high or risky, lenders will deny you or give you a higher interest rate and/or mortgage payment. Before you begin the process of purchasing a new home, consolidating debt is one way that you can drop your monthly mortgage payments.
Your choices for debt consolidation depend on whether or not you currently own a home. If you don’t own a home, your choices are limited to a debt consolidation loan through a debt consolidation company or a personal loan. Personal loan rates depend on your credit and can range from 10% to as high as 30% or more. If you’re looking for lower interest rate to consolidate your credit, another option is to transfer your balance to a credit card with zero percent interest for an introductory period. This choice can be helpful if you are certain you will pay off the balance in full before the interest rate resets
If you own a home with enough equity and have good credit, you can opt for a cash-out refinance or a home equity line of line of credit. A mortgage lender can work with you to determine which option is best for you. A cash-out refinance will require higher closing costs, but you will end up with one loan rather than two mortgages. A home equity loan will give you a lump sum to pay off your debts, while a line of credit gives you the flexibility of paying off your other debts. Then, as you pay down the line of credit, you’ll have credit available still if you need it for emergencies. Find out if you can drop your mortgage payments by contacting us today.