If you are in the market for a home loan, your debt to income ratio matters a great deal. In general, the lower the debt to income ratio is, the easier it is to get approved for a mortgage at a good interest rate. However, there is a common misconception that even a slightly elevated debt to income ratio excludes someone from consideration for a mortgage. Even if you have considerable debt and your income is not in the six figures, it is still possible to obtain a home loan with reasonable terms. Let’s take a closer look at the role of your debt to income ratio when applying for a mortgage loan.

The Basics of Debt to Income Ratio

A home loan applicant’s rent/house payment, child support payment, alimony payment, car payment, monthly credit card payment and other monthly loan payments are accounted for in the debt to income ratio. Even homeowner’s insurance, real estate taxes, co-signed loan payments, and timeshare payments are included in the calculation. However, monthly living expenses ranging from grocery bills to child care expenses, health care premiums, and utilities are not included in the debt to income ratio.

Bills Included in Debt to Income Ratio Calculation

Once the decision is made to refinance, it is time to crunch the numbers. The new loan amount as well as the new interest rate are of particular importance. Enter all the numbers in a mortgage refinance calculator to quantify the monthly savings resulting from the refinancing as well as the new monthly payment and savings across the lifetime of the loan once the estimated costs for refinancing are accounted for. Keep in mind, you will have to pay fees, possibly upwards of several thousand dollars, to refinance your mortgage. It might take a while to break even on the transaction after these fees are paid. Though you will enjoy monthly savings, the cost of refinancing in the first place will offset some or potentially all of those savings.

The Income Component of the Debt to Income Ratio

In the context of debt to income ratio, the income component is comprised of the applicant’s salary, wages, bonus, tips, pension, child support, alimony, and Social Security payments. Even additional income from stocks, mutual funds, dividends, and rental properties counts as income in the context of this important home loan application metric.

The Optimal Debt to Income Ratio

Debt to income ratios differ in accordance with the lender as well as the loan sought. In general, a debt to income ratio below 45% facilitates mortgage application approval. However, certain loans can be obtained with a debt to income ratio in excess of 45%. Now that automated underwriting is used, the applicant’s full credit, assets, and income are considered when determining whether the application for a home loan will be approved or denied. If you have a large down payment, fantastic credit, or liquid assets, you might qualify for a mortgage loan even with a debt to income ratio as high as 50%.

Be Patient and You Will Eventually Qualify for a Mortgage

If you do not qualify for a mortgage loan due to a high debt to income ratio, do not panic! With a little bit of work and patience, you can pay down your debt, lower your debt to income ratio, and soon qualify for a mortgage loan with reasonable terms. In fact, it might be prudent to wait to take on home loan debt until you have paid down some or all of your outstanding debt anyway. Aggressively attacking debt in the present and years to come sets the stage for a low interest home loan that ultimately helps you save even more of your hard-earned money rather than pay it to a mortgage lender in the form of interest. If you’re wondering if you qualify for a mortgage loan, contact our office today. We have a common goal: making you a homeowner. If you have questions about mortgage loans, contact us and let’s talk about them today! You might just be closer to owning a home than you realize.