DTI Ratio: What it Means for Your Mortgage, and 5 Ways to Improve it!

What Does DTI Ratio Mean for your Mortgage?

Debt to income ratio is a calculation of the percentage of your monthly debt payments, compared with your gross (pretax) monthly income. Monthly debt payments include mortgage payments, car payments, and any other minimum loan or card payments. Living expenses like gas, groceries, and utilities are not included.

Debt to income ratio is an important factor in qualifying for mortgages and other loans. The ideal DTI ratio for a mortgage is 36% or below. If your DTI ratio is too high, you may not qualify for the home loan you want. The lower the ratio – the better!

5 Ways to Lower Your DTI Ratio

  1. Pay off Debts Ahead of Time. Paying off a debt means you’re no longer paying a monthly bill on it. Paying off smaller debts first, or debts with a high payment compared to their balance is recommended to get the best results.
  1. Refinance larger loans over a longer period of time. This would apply to large loans such as student loans. You can extend the length of the loan to reduce your minimum monthly payments, which will also reduce your DTI ratio. Just keep in mind that repaying a loan over a longer period can result in more interest paid over the life of the loan.
  1. Transfer credit card debt to a lower interest card. There are often credit card offers available with an introductory period of lower or no interest. You can transfer existing debt to a low or no interest card in order to reduce your minimum monthly payment and the total amount paid over time! At the end of the promotional period, you can always transfer again to a lower interest card!
  1. Look for ways to increase your monthly income. With the world of Etsy and YouTube channels, there are plenty of ways to earn extra income in addition to your monthly income. If you have a specific hobby or craft to share, it can gain you extra funds every month.
  1. Consider a 401k loan. You can take funds out of your 401k to pay off debt, and then repay the loan over time at zero interest. You will however need to pay taxes on the 401k loan amount. This can save a substantial amount on a high interest loan. Just be sure to repay the 401k loan to yourself as soon as possible to keep your retirement savings on track!

Reducing your DTI improves your overall budget, can help your credit score, and puts you in the right position to purchase a home you can comfortably afford. If you have any questions about your DTI in regard to purchasing or refinancing a home, please contact me today!

House Hunting Online

Hunting for a new home online is a great place to start your search, but it should not be your end all be all. Good listing agents are excellent at highlighting the best features of the home, but keep in mind there may be more than meets the eye. To make the most of your time and efforts and gather a well-rounded picture of home listings online, keep the following three things in mind.

  1. Stay up to date. When you start your search, make sure you find a site that pulls up-to-date listings directly from the multiple listing service (MLS) where real estate agents actively post their most current homes for sale. Many online resources update less often or fail to remove listings that are off the market, making it more difficult to sort through the clutter.
  2. Pictures can be deceiving. Real estate photographers are experts at showing a home in the best possible light. Many use tools and strategies to boost appeal, such as a fisheye lens to make areas look larger and creative editing to make colors and textures really pop. But, often listings will not contain photos of unappealing parts of the home, like small closets or outdated bathrooms.
  3. See it to believe it. Once you find what appears to be your dream home online, call up your real estate agent and schedule a showing. You want to take the opportunity to vet the home in person and explore every part of it before beginning the offer process. Your real estate agent will help you cover all your bases and will ask questions you may not have thought of.

HOW YOU CAN FINANCE YOUR HOME RENOVATION

Outdated kitchen. Overrun backyard. Unusable basement space. If you have a home renovation project on the mind, the first thing you have to consider is how you are going to finance it. Here are the most common options to make your dreams become a reality.

Cash. Paying in cash is the most straightforward financing option, just save until you have enough money to cover the expenses. This will help eliminate spending outside your budget; however, it can also extend your timeline.

Mortgage Refinance. If you’ve been making payments on your home for a few years and your interest rate is higher than current market rates, you may be eligible for a mortgage refinance, reducing your payments and freeing up some money.

Cash-Out Refinance. You can tap into your home equity and borrow up to 80 percent of your home’s value to pay off your current mortgage plus take out more cash to cover the renovations. This option is encouraged only when you’re making improvements that will increase the value of your home, as it can add a lot of interest and fees.

Home Equity. Getting a home equity line of credit allows you to borrow money against the value of your home. You receive usually up to 80 percent of your home’s value, minus the amount of your loan.

Retirement Funds. Homeowners can consider pulling money from a 401K or IRA account, even though they aren’t specifically meant to cover a home renovation. This option might incur additional penalties or tax payments, but may be worth it when making improvements that will benefit them financially in the long run.

HIDDEN FEES TO BE AWARE OF WHEN PURCHASING A HOME

Purchasing a home is arguably one of the biggest financial decisions you will make in your lifetime. As you start your hunt, don’t forget there will be other costs associated with your purchase then the price of the home. Here are 5 fees to keep in mind as you begin to budget.

  1. Home inspection. This is a crucial step in the home buying process. The findings that come from the inspection can help you negotiate price and repairs. Generally, you can expect to pay between $300 to $500 depending on the home and the location.
  2. Title services. Title services encompass the transfer of the title from the seller and a thorough search of the property’s records to ensure to no one will pop up with a claim to the property. Additionally, you may need to buy title insurance which will protect the lender or your investment in the home.
  3. Appraisal fee. Before getting a loan, you will likely be required to get an appraisal of the home to determine its estimated value. This will be conducted by a third-party company and the cost can land anywhere between $300 and $1,000, depending on the size of the home.
  4. HOA fees. Many communities have a homeowners’ association that enforces monthly fees. This money is used for general maintenance and updates to areas like pools, parks, and more. Typical HOA fees are around $200 per month.
  5. Taxes. The taxes each buyer pays at the closing table differ, but it is not uncommon for it to be up to two months’ worth of county and city property taxes. Additionally, there may be taxes for the transfer of the home title.