Obtaining your first home isn't as simple as going to the bank and applying for the loan. Among all the information lenders review to decide whether they'll give you the mortgage and what your interest rate will be, the debt-to-income ratio is one of the most important. This ratio is how much debt you have compared to the amount of income you're currently bringing in. The higher the ratio, the more interest you'll pay. Bring this ratio down by following these steps so that you'll enjoy a lower interest rate and save thousands of dollars.
Step 1: Pay Down Your Credit Cards
Review the amount of money you owe on your credit cards as compared to what your credit limit is on each one. This is known as balance-to-limit ratio. The less you owe on them the better. Paying credit cards on time each month helps to build your credit worthiness, but always having these cards maxed out could spell trouble for your interest rate, even though it doesn't change your credit score.
Because being nearly maxed out on your credit limits signals financial trouble to creditors, pay your cards down until you reach a balance-to-limit ratio of about 30 percent. Mortgage lenders will see that you are careful about how you use credit, instead of feeling that you may be using it recklessly.
Pay off some credit cards as well. While the amount of credit cards you have doesn't have anything to do with your credit score, lenders can think that you have too much credit available to you, and either deny your mortgage or give you a higher rate. One or two cards is good to aim for.
Step 2: Eliminate Personal Loans
Budget some extra money to pay off any personal loans that you might have. This includes any payday loans or personal bank loans with no collateral. Pay down boat loans or other loans for luxury items you're making payments on.
A car loan is expected when trying to get a mortgage, but if you're in a financial position to pay down or pay off what you owe, it would be a good thing to do to lower your debt-to-income ratio.
Step 3: Pay Off Outstanding Debts
Review your credit report to look for any unpaid debts. Sometimes is easy to overlook things such as medical bills, unpaid parking tickets and other debts that ding your credit score.
As insignificant as some of these debts sound, they do add to your debt-to-income ratio, so take care of them before applying for your home loan.
Step 4: Demonstrate Some Patience
It takes time to pay off debts to qualify for a mortgage with a low interest rate. It also takes time for your hard work to show up on a credit report as a higher score. Be patient and wait for your rating to improve before settling for applying for your mortgage.
Ask your real estate agent, such as Lori Reinalda Team - RE/MAX Results, for referrals on the best mortgage broker that works with people in your specific situation. You just might find that obtaining your mortgage doesn't take as long as you thought it was going to. But once your credit rises, you'll see that you're offered a better rate and your dream home is more affordable.
