New Orleans First Time Home Buyer Advice
When it’s time to buy a home, most people think they can buy more real estate than they actually can qualify to borrow.
Why the lower amount? Your debt-to-income ratio (DTI) that the bank uses to determine the maximum mortgage you will qualify for.
What’s my debt-to-income ratio?
Your debt-to-income ratio is the total of your recurring monthly payments (car, mortgage, credit cards) divided by your monthly income. In this case, the lower the number the better, since most lenders don’t want to see a ratio higher than around 43.
Example: Your recurring monthly payments add up to $3,000. Your monthly income is $5,000. This puts your debt to income ratio at 60%. Too high for a mortgage approval.
How to reduce your debt-to-income
There are just 2 ways to reduce your number: increase your income or decrease your debt. Decreasing your debt is probably easier and faster than increasing your income, so before you start home shopping, consider spending some time paying off some of those small credit card balances or other items that are pushing your DTI up.
Don’t sabotage your purchase
After you’ve talked to a lender to determine your purchasing power you shouldn’t buy any big ticket items such as a furniture or a car until after the closing, since this increase can push your numbers up and disqualify you from buying a home. Don’t trade off the house you want for the sofa that you picked out for the living room.