Getting a home loan means a homebuyer will probably be taking out the largest loan of their lives. When purchasing a home, many factors are involved in the mortgage application process. Individual factors of a home buyer and their financial standing, credit score, and personal debt are always weighed in balance with the relevant economic factors when a bank makes a decision on whether to approve or deny a mortgage application. Here's what you need to know about personal debt and mortgage applications.
Do I Need to be Debt-Free to Buy a Home?
Generally, no you don't need to be debt-free. Although the answer to this question will vary depending on the condition of the housing market, the particular bank you visit, and your personal income versus personal debt ratio. Unless you are looking at a zero-down-payment loan, you will need cash to cover the costs of the down payment, which can start at 1 percent (generally it's more. Common FHA loans in the United States are around 3.5%), in addition to closing costs.
It is important to note that the traditional debt-to-income ratio is 28 to 36, which allows buyers to have consumer debt when taking out a loan. The ratio means that the buyer can use 28 percent of their income for a mortgage payment (insurance and taxes included), and can use 36 percent of their income towards a mortgage as well as other personal debt.
Although personal debt can, at times, stand in the buyer's way of getting approved for a mortgage, the buyer should always consider whether converting cash to a debt-free standing is a good option when buying a house.
What If My Mortgage Application is Denied?
If your mortgage application is denied due to your personal outstanding debt, there are many different measures you can take to acquire debt relief. Often, time itself has a way of easing problems when it comes to mortgage lending. A shift in the economy and even a very slight shift in the housing market can change the situation for you. If mortgage rates drop even slightly, this could mean a significant decrease in your monthly payment - and could, therefore, be the difference in getting approved.
Another effective option is to get a co-signer on the mortgage loan, which means part of the co-signer's income can be contributed toward your loan amount. Having a co-signer on the loan does not mean they have to live on the same property or pay half of the monthly mortgage costs. It just means that the co-signer is responsible for the mortgage if you fall behind.
Don't be discouraged if you don't succeed on the first try. If the first lender you speak with rejects your mortgage application, look at other lenders. Each lender has their differences, and when one lender says no another may likely say yes. Just be certain you are receiving a good loan with an interest rate that you can live with. Greatly reducing the amount of debt you have will help you get approved.
The best thing a home buyer can do when weighing options for paying off their debt or purchasing a home along with their debt is to speak with the right professional and get educated on the subject. Since every individual has a unique set of circumstances, it is important that each homebuyer seeks professional guidance before making the (likely) largest purchase of their lives.
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