How Much Is Too Much Debt for a Home Loan?
by Laura Bramble
Your debt load is a factor in loan approval.
Lenders determine your debt level by determining your debt-to-income ratio (DTI). This is a number that signifies the percentage of your set monthly debts versus your monthly gross (pretax) income. Your set monthly debts include your mortgage or rent payment, car loans, student loans, other installment loans, credit card minimums, support payments or other court-ordered monthly payments. It does not include car insurance, utilities, commuting costs, memberships and dues, or any other monthly payments that do not show up on your credit report as a debt. Your monthly gross income comprises your salary, regular overtime or commissions, rental income, support payments and any other awarded payments such as pension or disability.
Conventional mortgage loans have the strictest DTI guidelines--28/36. Lenders want to see your new mortgage payment take up no more than 28 percent of your gross monthly income and your total set monthly debt, including your mortgage, to consume no more than 36 percent of
your income, according to Investopedia.com. Lenders will sometimes make exceptions on the mortgage amount if the rest of your debt is low, in addition to your good credit history and score. This shows that even though you are taking on a little more house than you can afford, you have demonstrated over time that you handle your financial responsibilities well and are still a safe risk. You may have to pay a higher interest rate, though.
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