Lil’ Dicky had it right in 2015: save that money. Do as much as you can with as little as possible. Here’s why:
One of the most important numbers that will pop up during the mortgage approval process is your debt-to-income ratio. It’s a logical metric and reasonably important. Your debt to income ratio measures the money you having coming in against the money you owe monthly to creditors.
To calculate your debt to income, do the following equation (on your own, for free!):
Sum of monthly credits owed/ monthly income
This route includes all credits and debts such as auto, insurance, child support and student loans.
Another way to calculate the ratio is by focusing only on your housing credits:
Sum of monthly housing-related credits/ gross monthly income
In other words, how much money is left to spend on housing?
The importance on debt to income ratio for mortgage comes in to play when the lender is determining how high of a mortgage you can afford to pay each month. The lower your debt-to-income ratio number, the better mortgage you’re likely to earn.
So what is a good debt to income ratio, you ask. A typically favorable number to remember: 36. Lenders like 36% of your monthly income to be assumed by debt and they want no more than 28% to be assumed by the mortgage. Numbers start earning a bad reputation as they near 40%, though it’s still possibly to get a mortgage if you’re in these high-stakes numbers. The cut-off happens at about 50%. If half of your income is assumed by debt, you’re likely living too dangerously for a lender to consider you a safe investment.
The takeaway from the equations should be to reduce your credits and debts. The less you spend, the lower your ratio will be. Making more money doesn’t necessarily guarantee a lower ratio if your spending habits also grow positively against that bigger paycheck. Curb your spending and credits and you should find your ratio in a good place.
Whether you’re thinking about purchasing, in the beginning stages of the process or think it’s an option ten years down the line, start keeping the mortgage debt to income ratio in mind. Strive to have plenty more coming in than flowing out. This number can make or break the mortgage you want. It can even make or break getting a mortgage at all. Keep on eye on your ratio at all times and consider it before committing to long-term credit obligations.