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How Your Debt Can Affect Buying a New Home

When purchasing a property in Alpharetta, your lender will look at several factors to determine if you qualify for a home loan. A few of these factors include your income, credit score, current employment, down payment, and your debt. Your debt plays a large role in whether you can receive the proper financing to purchase a home or if you will be denied the home loan. Here’s why. 

Your Debt-to-Income Ratio

When applying for a home loan, your lender will look at your debt-to-income ratio. This is the number that tells lenders what percentage of your monthly income is currently being used to pay off various debts such as consumer debt, automobile loans, student loans, etc. 

Ideally, you want your debt-to-income ratio to be less than 43%. Most large banks will not approve you for any type of home loan if the ratio is larger than 43%, although some are much stricter and will not approve any percentages greater than 36%. However, each bank will have different requirements that must be met.

How Can I Determine My Debt-to-Income Ratio? 

There are several ways that you can figure out this number on your own. One of the easiest is to simply plug your financial information into an online calculator. If you desire, you can do the math by hand. To do this, use the following steps: 

  1. Add up all current monthly debt payments. This includes your credit cards, student loans, automobile loans, mortgage payments, and any other debts you are paying. 
  2. Divide the total debt payment amount by your monthly gross income. 
  3. Convert your decimal answer in step two to a percentage. 

What Can I Do If My Percentage is Too high? 

If your debt-to-income ratio is high and you have a difficult time qualifying for a home loan, not all is lost. There are several things you can do to lower your percentage. This includes: 

  • Pay extra money each month toward your debt. Even just an extra $50 a month can make a difference. 
  • Create a debt payoff plan that works for you. There are many methods such as the avalanche method and the snowball method. Choose a plan that works for your specific lifestyle and financial situation and stick to it. 
  • Avoid using credit cards, especially for large purchases. You should postpone larger purchases until you can pay with cash. 
  • Find ways to increase your monthly income. This could include tasks such as asking your employer for a raise or starting a side hustle. 

If your debt-to-income ratio is high. Do not be discouraged. Talk to a local lender to discuss possible financing options and strategies you can implement to place yourself in a strong financial situation.

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