Financial Literacy – Debt To Income

When my wife and I were in our mid-20’s we decided to purchase a home. Neither of us had any experience in the process. The learning curve for purchasing a home is very steep. Our parents were teaching us what they knew…..but primarily ‘experts’ were acting on our behalf. Paperwork, terms, and fast approaching deadlines clouded our thinking and allowed us to get lost in the process. Our biggest takeaway was to learn from the ordeal and educate ourselves for the next purchase.

The first step was to examine terms that were explained to us along the way. Debt to Income was one of the few we noted. The broker told us that 25-35% was acceptable, but if an applicant is above 30% “there will be under a bit more scrutiny.” Luckily, our application debt to income was a shade under 30% but the discussion made us cognizant of the possible impact.

Debt to Income is your current monthly debt (loans, mortgages, etc.) excluding your basic monthly expenses (think groceries, utilities, etc.) divided by your gross income. (Gross Income is your check total before everyone takes their piece) Creditors are using this number to make assumptions around whether or not you will have the ability to repay the loaned amount. Take a glance at your number before you apply for a loan to make sure you understand the impact a high debt to income percentage will have. The most likely outcome of a high percentage is a loan denial, higher interest rate, or additional signers on the mortgage.

Arming yourself with information is the best way to approach meaningful decisions. Understand the metrics used to decide your future.

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