Getting Your Debt-to-Income Ratio in Shape

image005 The mortgage lending business changed in January when the Consumer Financial Protection Bureau’s Qualified Mortgage rules went into effect.

The bureau enacted these new rules to bring what many consider common-sense guidelines to the mortgage-lending process. The goal is to guide lenders to only passing out mortgage dollars to those borrowers who can afford to pay their loans back. The hope is that the guidelines will help prevent a repeat of the mortgage crisis that began in 2007.

If you remember, starting that year, a surging number of homeowners found that they could no longer afford their mortgage payments. This led to a record number of foreclosures and helped crash the national economy.

Part of the problem? Critics say that too many lenders lent too many borrowers more mortgage money than these borrowers could afford to pay back.

That’s why the new Consumer Financial Protection Bureau rules state that for a mortgage to count as qualified, borrowers, after taking out the mortgage loan, must have monthly debt levels, including their new estimated mortgage payments, that are no more than 43 percent of their gross monthly income.

Or, as a recent story by CNNMoney puts it, mortgage borrowers must have a debt-to-income ratio of no more than 43 percent.
So, what if your debt-to-income ratio is higher? There are two ways to lower it. First, you can boost your monthly income. If your income rises while your monthly debts remain the same, your debt-to-income ratio for fall.

You might be able to raise your monthly income by taking a part-time job. Maybe your spouse can enter the workforce. Or maybe you can rent out a room in your home. Any income that enters your household on a monthly basis is considered part of your gross monthly income.

Remember, too, that monthly income that you receive as part of a legal settlement is factored into the income side of our debt-to-income ratio.

It might be easier, though, to lower your debts. This, too, will improve your debt-to-income ratio. As your debt levels fall, your ratio will lower even if your income remains unchanged.

Look over your household budget to find monthly debt that you can eliminate. You can cancel cable TV or your gym membership. Maybe you can unsubscribe to newspapers and get your news for free online. You might take a bigger step, selling that car that you are still paying off every month and instead buying a used car that doesn’t require monthly payments. Anything that reduces your monthly bills will improve your chances of qualifying for a home loan.

If your debt-to-income ratio is too high, you might want to consider buying a less expensive house. Lower monthly mortgage payments will have a big impact on your debt-to-income ratio. They can also reduce the amount of stress in your life. You won’t enjoy your home if your monthly mortgage payment consumes too much of your income. It’s not fun scrambling each month to scrape together enough dollars for your mortgage payment.

Sometimes spending less is the best way to maintain a healthy debt-to-income ratio.

This blog has been provided by Union Mortgage Investment Group

6705 Red Road Suite 508 Coral Gables, FL 33143

305.598.9896 (Office)