Don’t Let Debt Defer Homeownership

Blog posted On June 14, 2018

During the mortgage loan application process, lenders review debt-to-income ratio to ensure that the applicant will be in a good position to repay the loan.  Unfortunately, many Americans, especially Millennial-aged first-time home buyers, believe they are too debt burdened to buy a home.  With record-high student debt, the national median age of first-time home buyers in 2017 was 32-years-old.  

Buying a home is a big financial milestone, and the first step many Americans take toward building wealth.  The longer you defer homeownership, the longer you defer this wealth-building opportunity.  It is possible to buy a home, even if you are carrying debt like student loan debt.  Ask yourself these four questions and find out if you’re ready.

What is your debt-to-income ratio?

Most lenders prefer the home buyer’s debt-to-income (DTI) ratio not exceed 40%. In some cases a maximum DTI of 50% is acceptable.  High debt-to-income ratio is the reason behind 27% of mortgage application denials.  To calculate your debt-to-income ratio, divide your total monthly debt by your gross monthly income.  If your ratio is lower than 40%, you could still qualify for a mortgage.  If your ratio is higher than 40%, consider meeting with a financial advisor to work out debt consolidation or repayment plans.

Example: $1,000 Total Monthly Debt / $4,000 Gross Monthly Income = 25% DTI

How much have you saved for a down payment?

A 20% down payment can help offset the cost of mortgage interest and may help you secure a better interest rate.  However, a 20% down payment is not required, even on a conventional mortgage loan.  In 2017, the median down payment for first-time home buyers was 6%.  With over 2,500 down payment assistance programs nationwide, there are even more opportunities to grow your down payment.  Assistance programs vary regionally and based on the type of mortgage loan.  With HomeFundIt^TM by CMG Financial, you can also increase your down payment with crowdfunding.  Add contributions from family and friends to meet or exceed your down payment goal.  The larger the down payment, the less likely you will have to pay mortgage insurance or higher interest rates. 

What’s your price range?

All because you are preapproved for a $400,000 mortgage loan does not mean you have to purchase a house of equal value.  When you have good credit, banks and lenders tend to approve you for larger loans.  If you are already struggling to repay debt, like student loan debt, it’s not a good idea to take on the maximum mortgage loan.  Shop around, find a home that is within your budget and lower than your maximum approved amount. 

Will you be taking on other debts in the future?

When you are applying for one line of credit, like a mortgage loan, hold off on applying for additional lines of credit, like a car loan.  Applying for multiple lines of credit at once can hurt your chances of getting approved for either loan.  If you know you are going to have to take on additional debt soon, like student loans for upcoming graduate school, it may not be the best time to buy a home.  Consult with a mortgage professional in advance so they can get a better idea of your full financial picture.

Debt, like student debt, does not have to hold you back from buying a home.  With down payment assistance programs, different loan programs, and other options, homeownership is possible.  Meeting with a mortgage professional is one way to evaluate your current financial situation and determine if you are ready to buy a home. 

Sources: Down Payment Resource, Forbes, MarketWatch, The New York Times