If you’re getting ready to buy a new home and start the process for getting a mortgage, make sure you assess your credit status before you get started, and that includes taking stock of existing loans. Auto loans, credit cards, personal loans, or other types of pre-existing loans can affect your mortgage application.
When you apply for a mortgage loan, OVM Financial will look at your current income and expenses, which will include monthly payments you’re making on personal loans or credit cards. Your total income versus your total expenses will not only determine if you can qualify for a mortgage loan but also the amount for which you can qualify. So does having a loan affect a mortgage application? Yes, it can, and here’s what you need to know.
Understanding debt-to-income ratio
Your debt-to-income ratio, also known as DTI or “back-end DTI,” is the percentage of your monthly gross income used to service debt, like a mortgage, car loan, or credit card. To calculate your DTI, divide your total monthly debt by your total monthly income. Your back-end DTI should be less than 43%; however, some programs allow up to 50%.
OVM Financial may also look at your front-end DTI, which is the percentage of income that will only cover housing costs. Calculate this by dividing your total housing costs (principal, interest, taxes, homeowner’s insurance, and other expenses) by your monthly income. Typically, your front-end DTI should be lower than 28%.
If a pre-existing loan, such as one for that awesome sports car, is pushing your DTI higher than you’d like, it may be time to kiss the cherry red convertible goodbye in exchange for your new home.
Paying off loans to strengthen DTI
There are a few perks to paying off loans or credit card debt before applying for a mortgage. In addition to potentially boosting your credit score, it can also free up some monthly funds to strengthen your DTI. Not only is that attractive to your OVM Financial loan officer, but it may help you breathe easier when examining your new monthly budget and making the financial transition. Plus a lower DTI could even score you a better interest rate.
The importance of pre-mortgage loans
Auto loans, credit cards, and other personal loans can be a valuable tool to establish a healthy credit history before applying for a mortgage. Making your payments on time and properly managing your debt in the years preceding your mortgage application can set up an attractive credit history for you to confidently present to your future loan officer.
Purchasing a home is an exciting accomplishment. Reach out to an OVM Financial specialist today, so we can make sure this monumental experience flows smoothly.