After 10 years of marriage, I’m still enjoying living in the first home I moved into with my husband. Buying a first home can be one of the most exciting events in a person’s life. Before making this important expenditure, people need to first sit down and determine how they will successfully finance it. After all, a home will likely be the most expensive purchase you make in your life. Talk to a loan officer and determine how much money you can reasonably borrow. Then, decide how much money you want to use as a down payment. You also must decide how many years you will finance your home for. On this blog, you will learn about the process of buying a first home with a loan.
Lenders want to make sure you can afford the home you're buying, so they calculate how much of your monthly income is needed to satisfy your debts to ensure there's plenty of money left over to pay the mortgage. This is called the debt-to-income (DTI) ratio, and many banks will turn down your application if the percentage is too high. However, there are two ways you can still get approved with a high DTI.
Look for a Compatible Program
Not all mortgage lenders are alike. Some are very strict when it comes to the approval requirements, and others are a little more forgiving. The challenge here is to find a lender that is willing to accept applicants with high DTI ratios.
For instance, most conventional lenders prefer applicants whose DTI ratios are 36 percent or less. However, the Federal Housing Authority (FHA) will approve buyers with ratios as high as 43 percent, and will even make exceptions for those with higher percentages under the right circumstances (e.g. a large down payment).
Be aware, though, that the approval may come at a price. The lender might charge more interest or ask you to purchase mortgage insurance when you are not technically required to have it. Be certain you understand the conditions of the loan before signing any contracts.
Reconfigure Your Finances
The best option for dealing with a high DTI ratio is to pay down your debts until you hit the right percentage. In addition to making it easier to qualify for the loan, having less debt ensures you can keep up on your mortgage payments, staving off the possibility of foreclosure in the future.
If you can't do that, then your other option is to rework your debts to lower your monthly payments. Since banks calculate your DTI based on your bills, reducing them will naturally lower your ratio. For instance, paying off high-interest credit cards with a low-interest personal loan will usually result in smaller payments. Buying down the interest rate on your home loan will reduce the mortgage note, which will also trim your DTI.
It's a good idea to consult with a mortgage professional before taking any of these steps, though, because some of them can impact your credit in unfavorable ways. Taking out a new personal loan may reduce your score, for example, and you'll have to wait a few months for the effect to wear off. A knowledgeable agent can provide insight on the best way to deal with this situation to protect your homebuying prospects.
For assistance with purchasing your first home, contact a local company like Cornerstone Residential Mortgage.