Posted on: 30th Aug, 2012 01:18am
Mortgage loan approval depends upon various factors. Apart from your credit history and down payment capability, another important determinant of a mortgage loan is your debt to income ratio. Lenders take this ratio very seriously while approving you a mortgage loan. To get approved for a conventional loan, the DTI ratio should not exceed 36%. Just immediately before taking a mortgage loan, you should not take out a car loan as it increases your DTI ratio.
Debt to income ratio indicates your monthly income that goes toward debt payments. Debts may include mortgage loan & car loan, child support & alimony, credit card bills, student loans, and other types of credit. It is calculated as an individual’s total monthly debt divided by gross monthly income. As a general rule it is accepted that your monthly mortgage payment should not cross 36% of your monthly gross income so as to get approved for a conventional loan. Again, to get approved for an FHA loan, your DTI ratio should not cross 41%.
If you take out a car loan just before taking out a home loan, it does not do any good to this ratio. This actually increases your debt to income ratio and your chances of getting approved for a new loan are diminished. Also you need to take into consideration that you will be required to pay insurance premium for owning a car. Car insurance is compulsory in the country. You need to take into consideration the car insurance costs before taking a car loan. Keeping in mind all the costs associated in a car loan, you will have to decide whether to take out a car loan just before taking a home loan or not.
However, if you are financially well positioned and your debt to income ratio does not move above the earlier mentioned benchmark ratios, then you can take the car loan. Another important thing is your requirement of owning a car. Your requirement, debt to income ratio, gross income, all should come into consideration while making the decision to take a car loan before taking out a home loan.
Debt to income ratio indicates your monthly income that goes toward debt payments. Debts may include mortgage loan & car loan, child support & alimony, credit card bills, student loans, and other types of credit. It is calculated as an individual’s total monthly debt divided by gross monthly income. As a general rule it is accepted that your monthly mortgage payment should not cross 36% of your monthly gross income so as to get approved for a conventional loan. Again, to get approved for an FHA loan, your DTI ratio should not cross 41%.
If you take out a car loan just before taking out a home loan, it does not do any good to this ratio. This actually increases your debt to income ratio and your chances of getting approved for a new loan are diminished. Also you need to take into consideration that you will be required to pay insurance premium for owning a car. Car insurance is compulsory in the country. You need to take into consideration the car insurance costs before taking a car loan. Keeping in mind all the costs associated in a car loan, you will have to decide whether to take out a car loan just before taking a home loan or not.
However, if you are financially well positioned and your debt to income ratio does not move above the earlier mentioned benchmark ratios, then you can take the car loan. Another important thing is your requirement of owning a car. Your requirement, debt to income ratio, gross income, all should come into consideration while making the decision to take a car loan before taking out a home loan.
We are hoping to get a loan to but a house next year. We currently have a car loan that is almost paid off. We need a larger car and had planned to get one in the next few months, but I am wondering if it would make more sense to do it 6 months before we apply for a mortgage or if we need to wait until after we get a mortgage. A house is our number one priority.
Hi Laura!
Welcome to forums!
Taking out a new debt few months before applying for a loan won't be a good option in my opinion. It will increase your debt to income ratio which will affect you negatively when you apply for a loan.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
Taking out a new debt few months before applying for a loan won't be a good option in my opinion. It will increase your debt to income ratio which will affect you negatively when you apply for a loan.
Feel free to ask if you've further queries.
Sussane
There are many donts when it comes to financing a home....Dont run your credit, dont quit your job, dont go on vacation or cut your work hours while in process of a loan application, dont deposit money that you cannot source with cancelled checks, dont deposit any CASH, and dont buy anything...Above poster is correct, it will affect your Debt To Income ratio...Good luck
