You’ve graduated from college, landed a solid job, and saved a significant amount of money. Now you’re seriously thinking about buying your first home. You’re pretty sure you’ll be able to handle the added responsibility.
So are you ready to take the plunge? The answer is: it all depends. Here are two very important questions to ask yourself.
Why Do I Want to Buy a Home?
The Great Escape
Mr. Smith in the apartment unit to your left plays music so loudly it could wake the dead. Is relative quiet at 3 a.m. on weekdays asking for too much? Then there’s the neighbor across the hall, Ms. Jones, whose dog barks incessantly.
All things considered, you shouldn’t buy a home simply to escape issues with neighbors. The reality is that you could encounter similar problems no matter where you live.
All of My Friends Own Homes
Don’t feel pressured by the status of your social circle. You should buy a home when the time and conditions are right for you. Besides, you don’t know their personal finances.
What’s My Debt-to-Income Ratio?
Now it’s time to get down to business and crunch some numbers.
Your debt-to-income ratio (DTI) is a figure that lenders consider when you apply for a mortgage. It is the amount of your monthly income that goes toward paying debt. A “front-end” debt-to-income ratio is calculated by your estimated housing costs divided by your gross income. A “back-end” debt-to-income ratio is the percentage of your income that’s allocated for paying housing costs, student loans, credit cards, child support, car loans, and any revolving debt on your credit report. Generally, mortgage lenders like to see a back-end debt-to-income ratio of 36 percent or less, although the FHA will accept a debt-to-income ratio of up to 50 percent, per NerdWallet.
You don’t have to be a loan officer or a finance whiz to be able to calculate your DTI. Bankrate has a DTI calculator you can use, and offers an even more in-depth explanation of debt-to-income ratios.
If your debt-to-income ratio exceeds acceptable ranges you should focus on paying off debt in order to lower your DTI ratio, and consider applying for a mortgage at a later time.
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