What You Need to Know Before Getting a Home Loan
Like many things in life, debt can be both a blessing or a burden. Debt allows for a possession that will be highly advantageous to be achieved when in other instances it could never be achieved such as an education, a early car, or a home. An education can be very expensive in the short run but pay off huge dividends in the long run by increasing career pay by thousands. A car can almost be considered a necessity in modern life as sometimes personal transportation is a must have to be able to work a great job. And lastly, very few individuals are able to pay off their home when they first buy the home. Almost all Americans need to borrow capitol in order to live in a house. Debts that are used to invest or buy things that appreciate in value are almost always a wise investment desicion. The downside of debt is that already when it is being used wisely, it can quickly become overwhelming. When debt becomes overwhelming, any person will start to lose their desire for life and will feel retained or will just walk away from it destroying their credit.
In order to protect oneself from self destruction, an individual should have a plan that involves some safe principles. Honestly living by established guidelines from experts is a great precaution from pretty much ruining ones life. On top of guiding oneself, most financial institutions are pretty up to speed on not loaning or lending money to an individual who is overwhelmed with debt.
The fist step to understating what an individuals loan ability is is to calculate the MONTHLY income coming in before taxes. Income is more than is on a pay check, any alimony, lottery payments, investment returns like dividends from a stock, or a monthly annuity of any kind can be factored as part of a monthly payment. One of the main job descriptions of a loan officer is to figure out the total monthly income in order to better assist with the time of action of deciding what an individuals debt load is.
The second thing necessary to understanding the debt load is how much debt there really is in a borrowers name. Measuring the debt load includes more than just a car payment. Debt load includes everything from credit cards, student loans, personal loans, alimony, or any other liability an individual might have in their name that is withdrawn monthly or once a year.
Of course it is very important to the creditors that the individual does not overwhelm their ability to pay back. Every creditor will have their own personal preferences, but most lenders across the nation stick to a pretty set formula.
The first formula is the mortgage to income ratio. Once an individual knows their complete monthly income or increase, then they can figure out this ratio. A mortgage should not go beyond twenty eight percent of an individuals monthly income. For example, if an individual makes $100,000 a year that method they make $8,333 a month. That method the monthly mortgage should not go beyond 28% of $8,333 which is $2,333 a month.
The second debt rule is the debt to income ratio. This is a ratio that says all the debt in the home should not go beyond 36% of the complete monthly income. So back to the same person making $8,333 a month, they cannot or should not be in debt more than $3,000 of payouts a month.