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Debt To Income
A person may find that their credit score is excellent, but they are not out of the water just yet. The second most important determining factor for mortgage eligibility is your debt-to-income (DTI) ratio. As its name implies, the debt-to-income ratio is a percentage comparing your income to your liabilities. Your level of income is not a factor in determining your mortgage eligibility, so much as your ability to pay your mortgage based on your income versus your obligations. Because of this, a common pitfall a consumer can find themselves in is to believe that due to their high salary they will automatically be viewed favorably by a lender or, conversely, that because of their low salary, they will automatically be rejected.
The primary purpose of the DTI ratio is so that the lender will be able to have some level of assurance that the borrower will be able to meet their monthly obligation. The acceptable level of debt-to-income that a lender will require is very fluid, based on the type of loan you are trying to receive, your available assets, and other such factors. A good rule of thumb is that the ‘limits’ of the DTI ratio are 30/38. What this means is that 30% of your gross income every month should be consumed by your mortgage payment, where 38% of your gross monthly income should go towards your housing obligation plus any recurring debts (credit cards, student loans, etc).
Obviously, these ratios are not set in stone, as you can often qualify with much higher ratios, but it is important to be aware that this is not just a little numbers game. For purchases specifically, if you cannot qualify because your debt-to-income is too high, then that means that the home you are trying to purchase may be too much for you to handle currently… even if you are being assured you could still get the loan if you really wanted to! You must never let yourself to fall into the trap of purchasing a home just because you can qualify for it, without thinking of whether or not you should.
In the end, it is up to your discretion, but with the mortgage market in the state that it is in, it would be prudent to ensure that you do not bite off more than you can chew, for the repercussions in today’s market can be devastating.