Debt to Income Ratio

Debt to Income

Your FICO score is just one factor in determining how much home you can buy. How much debt you have compared to your income is certainly a concern for lenders. For many buyers it’s a main determination for the size, location and amenities. 

Banks based your borrowing and payment power on a percentage of how much of your income is already obligated to existing debt. A lender needs to know that you have funds available for a house payment, after you pay you car payment, credit card and student loans. 

Lender Requirements

Your lender and their underwriters all have their own requirements and those are heaviliy influenced by federal regulations. These regulations are much more robust since the Dodd Frank Act  that was put into place after the real estate bubble popped in the early 2000s. This is one of the reasons the real estate market isn’t likely heading towards a similar occurence with this market. I have a great video HERE that may help explain why I think we aren’t heading down the same path. 

My friend and colleage Kendall Ormsby at Advance Financial Group  sent me some additional info and in the coming weeks I’ll have a small “buyers handbook” put together. In her details she talks about the rule of 45. This means your total debt, including your housing, transportation, student loan and consumer debt, shouldn’t exceed 45%. 

My family bases our financial decisions on Dave Ramsey and his program. In his teachings, your home should be 25% and no more than 1/3 of your pay. This and the rule of 45 become very difficult with housing prices skyrocketing over the last 18 months. If you have a high percentage of income obligated to debt, your ability to qualify for a loan will be (and probably should be) called into question. 

House Poor

You absolutely do not want to be housye poor. If you buy a home larger than you can reasonably pay your blessing will become a curse. If your debt is too high, and your margins are thin, you will grow to regret the home you thought you loved….the blessing will soon become a curse. 

More on the way

Once I get the book created, I plan on doing an entire series on buying and selling. I’ll be spending a lot of my small amounts of free time over the coming months workong on.  It should be informative for anyone about to enter the market on either side of the table. There’s also more videos over on my web site and YouTube channel.  The education part of my business is truly one of my favorites. Please pass along the info to someone you think may find it helpful. Until next time…..Welcome Home!

Welcome Home 

Chris Whitehurst 

Rose and Womble Real Estate