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Helping You Navigate Complex Legal Issues

Consider your debt-to-income ratio when seeking a home loan

Gregory A. Lang

If you are starting to think about applying for a home loan, you will most likely go over your finances and try to determine how much money you will be able to reasonably and safely borrow. In addition to thinking about how much money you will have to put down - and therefore, how much you may have to seek via your loan -- there are other factors that will ultimately affect your ability to borrow money. Among the most important things your potential lender will consider is what is known as your debt-to-income ratio.

Defining the debt-to-income ratio

A debt-to-income ratio is a figure potential lenders will look at to determine whether they feel safe extending you a line of credit. History shows that homebuyers with high debt-to-income ratios frequently struggle with staying current on payments, so the higher this figure proves to be, the more difficult you may find it to secure the home loan.

Determining your debt-to-income ratio

If you want to get an idea of where your debt-to-income ratio might fall, you will first want to add up all your monthly expenditures. Include things like auto payments, insurance payments, school tuition and so on, and be as thorough as possible, because you can safely assume any potential lender will do his or her homework. Next, take that figure and divide it by your gross monthly income, which is the amount of money you bring in a month before taxes are taken out.

The ideal debt-to-income ratio

Whether your debt-to-income ratio will ultimately be accepted may vary from one lender to another, but it is probably going to be tough to get a loan at all if your figure falls somewhere above 43 percent. If your ratio is particularly high, you may have more luck pursuing a loan through a major lender than via a smaller one. The lender is required, however, to perform due diligence to determine that you should reasonably be able to repay the loan despite the high ratio in order to extend it to you. There are also some exceptions. You may still be able to secure a loan with a less-than-ideal debt-to-income ratio if you are pursuing a special type of loan, such as a VA loan.

Each situation is unique, and you can expect potential lenders to review a variety of different factors when determining whether to lend you money. Therefore, a ratio that works for one homebuyer may not fly for another.

Figuring out financing is also just one piece of the home-buying puzzle. With any type of sale, there are a fair number of contracts, each having potential legal repercussions. Due to this, many seasoned homebuyers, as well as first-time buyers, take comfort in seeking out legal representation to help through the process.

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