Debt Ratios do play a large role when you’re applying for a loan on your new home, and at the same time they don’t. For every loan program there is a debt ratio guideline that the loan person can follow. Loan officers, who are well trained and have been doing this for years, understand that these are just guide lines and that they aren’t set in stone. Your loan officer should take the time to customize and make a plan with you in mind, rather than a guide line that is pre-made.
A large part of what you can borrow is what you feel comfortable with. If your rent is around 2,000 now and you’re more than comfortable paying that as your monthly rent, then you can by all means start from there. If you’re struggling from pay check to pay check just to make the 2,000 you currently have, then that’s a sign to start lower. If you are more than certain you can pay over what you’re currently paying, then take the chance and start from there. Another way you can determine your loan amount is through something called payment shock. Let’s say you’re paying $1,500 for rent now, and then you would have a payment shock of 150% which would make it $2,250. This payment shock is the difference between what you currently pay, and what you would need to pay. They do this as a test to see if you can pay off a loan, they usually test this on people who are bordering on the loan.
If you’re not sure about how much you’re willing to spend or can spend, talk to your loan officer. That person will be able to give you your front and back end ratios, and from there you can plan what houses might be more suitable for your budget and loan.
The best thing to do is not decline your own loan application because of the high debt ratios. Many people think that just because of these numbers, they should forget their ideal home. That’s not the case, these are only numbers and if you work with your loan officer, you can possibly get around it and find a plan that works for you. Things that matter most are that you feel comfortable that you can make those payments, you are able to give a good down payment, and your credit history is on track.
