March 18th, 2016 6:02 AM by Jackie A. Graves
plan and budget your finances can have a big effect on whether or not you can
qualify for a home loan. For sound financial planning purposes,
eliminating the expenses in your life that contain the highest interest rates
first is generally a good approach. After all, why pay more interest,
right? But when you apply for a mortgage, the paradigm shifts from paying off
high payment obligations to prioritizing paying off debts that can improve your
borrowing power. With that in, here are a few things prospective homebuyers
Banks generally do not give any brownie points for you electing to eliminate high-interest debt, but they will score you
favorably by paying off debts with big payments.
Banks generally are not interested in the terms of your consumer
Banks are generally covering themselves first as they are bearing
all the risk.
Banks and mortgage companies do factor in what you are obligated
to pay each month as a benchmark for determining your credit capacity. This
approach might not sound very logical to someone who has a large payment on a
credit obligation with a great low interest rate.
mortgage is a loan primarily against your income. The simple concept of income
to offset a debt payment is what lenders look for among other things like
credit, character, collateral and capacity, but income remains supreme. Gross monthly income less
payments on current obligations (not what you choose to pay, but just the
minimum amount owed) is how lenders will generally determine how much borrowing
ability you have. (Credit scores will factor into how much interest you pay
on your mortgage. You can check your credit scores for free on
Credit.com to see where you stand.)
a car payment at
$400 per month (0% interest rate) for a remaining balance of
$10,000 versus a credit card payment
at $200 per month (16.99% APR) for a remaining balance of $5,000.
had an extra $5,000 to pay with, paying down the car would make more financial sense for buying a home than paying off the credit card, even with a
0% APR. Your payment-to-income ratio drives how much house you can really buy.
Lenders compute your payment-to-income ratio in the following way:
Sum of your total current payments + proposed total housing
payment ÷ monthly income = debt ratio.
Generally, with the exception of Federal Housing Administration
Loans, this ratio figure cannot be more than 45% of your total income. In our
car example above, paying off the car loan would free up $400 per month in
borrowing ability for a mortgage. This translates to about $40,000 in
home-buying power, quite a large number indeed, especially if you’re in a
follow these steps when you’re getting pre-approved:
First and foremost, pick a reputable, experienced lender.
Identify which debts have the least balances containing the
highest monthly payments.
Ask your lender to run scenarios including what you qualify for
now with the obligations as is and what you could qualify for if those
liabilities were paid off. It’s important to make sure those monies do not hurt
the down payment or closing cost figures.
Congratulate yourself on a job well done. Your prudent budgeting
may have just opened a door to a new neighborhood.
Situation is Different
Each and every homebuying situation is uniquely different. This
information may or may not pertain to your specific situation. The whole
concept is to cherry pick the obligations that pose the biggest threat to your
homebuying ability and pay them off in full if possible. By paying off high
debt-payment credit accounts, you also demonstrate you can actually afford the
home and subsequent payment you are applying for.
Scott Sheldon - To view the original article click here