Too much debt to qualify for a loan
Many home loan applicants think about their debt in relation to income when trying to purchase a home but don't know how much debt is too much for qualification. Every home loan applicant is evaluated to see how much debt in relation to income they have. When there is too much debt I often hear: Help! I have too much debt to qualify for a loan what should I do?
To determine a person's debt to income ratio three forms of debt are considered. It is evaluated in terms of monthly income and monthly payments. The types of loan payments that are included in this calculation are mortgage, installment, and revolving loans. Mortgage loans are monthly house payment(s). Installment loans are car loans, student loans, and personal loans. Lastly, revolving credit would be anything that doesn't have a set pay off plan like credit cards and personal lines of credit. Typically cable, utility, and cell phone bills do not count against a borrower in the debt to income calculation for qualification.
Loan guidelines have become more strict in the various programs on how much debt to income is allowed. Generally, a total debt to income ratio limit looks reasonable at 45%. However, in some cases a borrower can still borrow up to 50% and 55% of their income. This is why it is key to get prequalified by a lender before getting too excited about purchasing a home.
If a borrower qualifies at a 50% maximum debt to income ratio an example would be; a borrower makes $3000 before taxes in monthly income. Their monthly mortgage payment including property tax and homeowner's insurance, car loans, and credit cards, cannot exceed more than $1500 per month. Subsequently, if the requirement is no more than 45% then you would take $3000 x .45 = $1350 in total maximum payments per month.
If a borrower is trying to qualify for a loan to buy a house and the debt to income ratio is too high they have to think of a way to reduce their overall monthly payments. A radical change may have to happen to their financial situation and/or philosophy before they can even think of purchasing a house. Every individual and/or family has to start from somewhere. There needs to be a plan.
What is your plan for paying off debt? In my next post I will present some ideas on what needs to go into a debt reduction plan that you can manage yourself for free.
Too much debt to qualify for a loan
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