According to a recent study, about 15% of mortgage applications for a home purchase in the United States in 2018 were rejected. The main reason is not bad credit, although it ranks second. The most cause of mortgage application denial last year was debt-to-income (DTI) ratio.
This statistic speaks volumes about the mindset of lenders in Connecticut these days. They do offer mortgage rates in Guilford, Prospect, North Branford, and East Haven, but it’s clear that they’re more tolerant of less creditworthy borrowers than highly indebted ones.
Freddie Mac and Fannie Mae consider 43% the maximum DTI ratio a qualified mortgage borrower should have. It means all of your liabilities, such as credit card bills, including your projected loan payment, should not be more than 43% of your gross monthly income.
However, the “43% rule” is merely a suggestion. Many lenders will want to see a DTI ratio no greater than 36% to approve an application.
In hopes of keeping your DTI ratio as low as possible ahead of your mortgage application, you can focus on two things: increase your income or reduce your liabilities. The latter is more controllable, so let us talk about ways to pay off or pay down your debts more quickly.
Prioritize Debts With the Highest Interest Rates
Have you heard of a debt repayment strategy called the “avalanche approach”? This method focuses on putting as much money as possible toward the debt with the highest interest rate.
At the same time, make the minimum payment on your other liabilities. Once the most expensive account is gone, move on to the next highest interest rate until all of your debts are zeroed out.
The idea behind an avalanche approach is to help you save on interest. It does not work all the time, so crunch the numbers first to make sure you will actually pay less interest overall.
Target the Smallest Debts First
To score easy victories and motivate yourself to repay all of your debts, use the snowball approach instead. In this method, you will concentrate on your smallest bills to reduce your total number of debt more quickly.
The snowball approach appeals to the psychological side of debt repayment, not to the financial one. You might pay more interest in the end with this method, but it can encourage you to stay on track because you can get rid of individual debts faster.
A balance transfer credit card allows you to move your debt from another card and pay less interest. This kind of plastic can be a useful tool if you use the avalanche approach. A balance transfer credit card can come with a holiday period with a 0% annual percentage rate, which is a compelling motivation to repay what you owe ASAP.
Take Out a Loan to Pay Off Other Debts
Debt consolidation is an effective way to free yourself from many liabilities in exchange for one. A personal loan usually offers sizable funds to pay off several credit card debts. Negotiate for favorable terms so that you can pay your new debt’s monthly balance in full.
The great thing about lowering your DTI ratio before you shop around for mortgage rates is it generally helps grow your creditworthiness. Give this criterion priority to hit at least two birds with one stone.
