The process of buying a house involves a lot of time, planning, and financial preparation in order to make everything a success. To help you through the process of getting approved for your mortgage, here’s what you need to know about the debt-to-income ratio when buying a house in New Jersey:
What Is DTI ratio?
Simply put, DTI, or debt-to-income ratio is the percentage of your monthly income that you then pay out toward your existing debt.
As an example, if you make $2,000 every month and then pay out $1,200 to your existing debt, your DTI would be calculated at 60%. This 60% means that 60% of your monthly income goes strictly toward your overhead.
In case you’re wondering what falls into the category of debt here, we’re talking about credit cards, car payments, student loans, your current rent or mortgage, and even alimony and child support.
Anything that you are required to pay every single month will pile onto your DTI and increase that percentage.
How Is This Ratio Rated?
Now that we know what DTI actually is, what is considered a good DTI?
Most mortgage lenders ideally want to see a DTI of 35% or less, and this can be quite challenging for a lot of people. Beyond that ideal range, 36% to 49% is considered manageable, but not spectacular and could decrease your options when buying a house in New Jersey.
Anything in the 50% or greater area is normally seen as the potential danger zone by mortgage lenders.
How Does This Impact Me?
It may seem like a complicated way of looking at the big picture of your finances, but your DTI tells a lender a lot about your financial health and spending.
Having a low DTI is going to make you more appealing to lenders since that low DTI tells them you can be trusted with a loan, and they will see a steady return on their investment in you and the property. This confidence in you can then translate to qualifying for a greater loan amount and an easier process when buying a house in New Jersey.
However, the bigger deal here is opening the door to you not qualifying for a greater loan but a lower interest rate. Interest payments are what will end up costing you dearly down the road.
Cutting the interest rate may not make a huge difference in your monthly payments, but it will add up very quickly as the months and years pass.
What Can I Do to Help Myself?
The very first step to improving your DTI is budgeting carefully and doing everything to stick to that budget.
The goal of your budget is to cut your expenses with the intent to use that freed income to pay down your current debts. Paying off an existing loan will help a lot, and every little bit that lowers your DTI is going to do nothing but help you out in the pursuit of acquiring financing to buy a home.
The next step is to give yourself a realistic timeline to pay down your debts as much as possible while continuing to save money for a down payment on a home.
Mortgage lenders want to see a homebuyer that is ready and willing to make a substantial upfront investment into the property they are buying. If you have a lower DTI, they can feel confident offering you a larger loan for a lower interest rate, as you’re less risky.
Professional Guidance When Buying a House in New Jersey
If you’re considering buying a house in New Jersey and have concerns about your DTI, contact us today at 855-966-DEAL!