Your credit score isn’t the only number which is going to be important in how potential mortgage lenders evaluate you. Another number which can be as important as your credit score is your debt-to-income ratio.
Debt-to-income ratio is a simple concept—it’s a ratio which compares your debt to your income. The lower this number is the better off you are, and the more stable an investment you appear to be as far as lenders are concerned.
If this number is excessively high, not many lenders are going to be willing to add to your debt by giving you a mortgage since you may have trouble paying your home loan on time or in full.
Usually a debt-to-income ratio of 36 or lower is best, but the lower the ratio the better the deals you will be offered. Lower interest rates and better loan terms are available to borrowers with the lowest debt-to-income ratios.
You need to include all recurring debt obligations (these are the bills you pay monthly on an ongoing basis).
This means any existing mortgage (not just the premiums either, but interest and everything associated), insurance payments, home equity loan payments, loans on cars, educational loans, and whatever monthly minimum you may owe on a credit card.
If you have old medical bills you’re working on paying off, these would be included as well, as would any business or personal loans which you owe on.
Make sure you don’t leave anything out of your personal calculations; that way you will get as accurate a portrait of your situation as possible, which is important for your own sake as much as to predict what lenders will discover.
If you find out that your debt-to-income ratio is higher than 36, you will want to try and lower it if possible before you apply for a mortgage; that way you can get a better interest rate on your mortgage and not build up even more debt.
By taking care of some of your existing bills, getting a credit card with a lower monthly minimum, or perhaps selling any cars you don’t need, you can get your debt-to-income ratio to drop a bit.
If your ratio is quite high you probably can’t afford a house anyway, and shouldn’t be diving into a purchase which you can’t really afford. This is how people end up in bad situations in the long run after all.
As such, finding out what your debt-to-income ratio is can be as revealing to you as it will be to lenders and may provide you with some very good guidance if you’re getting ready to add more debt to your life.