Learn some ways to work around it.
The Ratio's the Thing Figure it.
The amount you can borrow is determined by the amount of your monthly mortgage payment and other debt as a percentage of your gross monthly income. Lenders call this your ratio. If your debt-to-income ratio greatly exceeds 36%, it can be a factor in your loan approval. Don't let a high debt ratio interfere with your plans.
Here are some solutions.
Restructure Your Loan It's not set in stone.
If you've got the cash, you can pay additional loan discount points to drive down the interest rate. This is called a "buydown." The lender will recalculate your debt ratio based on the lower monthly payment and everyone comes away happy. Or better yet, negotiate with the seller to fund your buydown. Yet another option is for the lender to fund your buydown. Making a larger down payment has the same effect. Obviously, the more money you put down, the less money you need to borrow which reduces your loan amount and debt-to-income ratio.
Lenders are much more willing to allow higher ratios if you make a bigger down payment, because statistically, people who put more money down are much less likely to default. If you put 20% down or more, that eliminates the need for private mortgage insurance (PMI) which further lowers your monthly payment and debt ratio.
Argue Your Case Talking helps.
Remember, obtaining a loan is just as much a negotiation as buying a home, if the lender is willing to talk. Let's say your current monthly housing expenses already exceed 28% of your monthly income, but you're still managing it. If you have immaculate credit, decent savings, and don't blow your money on luxury vacations, you're a reasonable credit risk for the lender. Or perhaps you're anticipating more income from a job promotion, or just graduated from law school or medical school with a 4.0 grade average-you can argue you'll soon be gainfully employed.
Count Everything... And document it.
Another way to beef up your income is to better document non-salary sources. Don't forget to count other sources, including commission income, overtime, part-time income, seasonal income, child support or adult family members who contribute to household expenses. If these sources were consistent over the last two years, your chances are even better. If you're self-employed, don't let the lender make a cursory glance at your last two years' tax returns, without mentioning the new contract you just landed. Or show three years of returns if your income was higher three years ago, or provide earnings in the current year.
Liquidate or Restructure Your Other Debt Get rid of it.
If you have consumer loans, credit cards or student loans, pay them off. That could reduce your overall debt burden enough to lower your ratio to an acceptable level. It's wise to start planning this well ahead of shopping for a home. The other alternative is debt consolidation, moving the high-interest loans into a more reasonable loan with easier monthly payments.
Got All That?
Now it's time to look at the pitfalls to avoid.
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