How Effective is Debt Ratios When Applying for a Loan?

July 16th, 2009

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.

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Debt Ratio

July 14th, 2009

Debt Ratios is more than likely, the most significant and important aspect of lending to date. A Debt Ratio is defined as the percentage of debt compared to you gross income. In order to have a Debt Ratio of 20, your bills and required spending for a month must be equal to 20% of your gross income for that month. Every lender will have a varied debt ratio, depending on different factors.

Lenders have a hard task to face when calculating and basing a loan on your debt ratio. Lenders of course, would like to give you the biggest loan they can because the interest will be larger. The interest coming back on an $80,000 loan will be larger than a $40,000 loan, and even though it would profit them, there is still the chance that the borrowers won’t be able to pay back the loan. If the lender gave a higher loan, the monthly payment for the loan may be too great for the home owners and due to non payments; they may have to foreclose the home.

The task of the lender is to find a common ground in between these two. While making sure they give a loan sufficient enough to help the borrowers, they need to make sure that it’s a safe investment and that they will be able to pay back the loans. So overall, it’s the largest loan possible within the parameters of the loan being paid back in a timely manner. Once again, it’s also dependant on what the lender is comfortable with, if they believe that the borrowers will be able to pay back a higher loan, then they may take the risk, every lender is different. Lenders have to use the debt ratios and determine which loans go along with which debt ratios in order to make sure the loan payments can be realistically met, while helping the borrowers.

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Posted in Mortgages