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Why debt-to-income ratio matters when purchasing a home

Posted on May 2, 2017

If you are working to secure a loan for your first Missouri home, you may have heard the term “debt-to-income ratio” thrown around a time or two. While potential lenders will look at factors such as your income and credit score, they, too, typically take a good, hard look at your debt-to-income ratio. At TDD Attorneys at Law, LLC, we help potential homebuyers navigate the complexities of the Missouri real estate market, and we can help you understand what you can do to make yourself more desirable to potential lenders.

You might hear that your best bet at securing a home loan is with a debt-to-income ratio that is no higher than about 43 percent, though this may fluctuate somewhat if you are pursuing, say, a Federal Housing Administration loan or a VA loan. The debt-to-income ratio is the number you get when you add up all your monthly expenditures, such as auto loans, private school tuitions or what have you, and divide them by your pre-taxed monthly income.

If your debt-to-income ratio is above 43 percent, potential lenders may hesitate to extend you the loan. Historically, home buyers with higher ratios have had trouble successfully repaying the loans, leading many lenders to refuse loans to applicants who do not meet these terms.

There are, however, steps you can take to improve your debt-to-income ratio, and therefore, your desirability to potential lenders. First, you want to avoid amassing any more debt, and you also want to try and put more toward your existing debt each month to speed up the process. More information about purchasing a residential Missouri property is available on our website.