Much is made of the 30 percent rule for debt-to-income ratio when getting a mortgage for a home in Philadelphia. It’s used to measure how much you can pay towards a mortgage every month without straining your budget. The post-war housing boom saw the creation of the 30-year amortized mortgage to help returning GI’s buy homes along with the 30 percent debt-to-income ratio to help them qualify. The rule has stuck around, although it’s undergone modifications through the decades. Here’s what you need to know about the ratio and how it affects your ability to buy a home.
What is the 30 Percent Debt-to-Income Ratio?
The ratio, also sometimes known as a rule, is used to determine how much of a monthly payment you can afford. When you apply for a mortgage, the loan officer at the Philadelphia mortgage company takes your monthly income, totals all of your monthly debts, and subtracts the total of your debts from your income. For example: You earn $4500 a month in gross income and your monthly bills total $1350. That means you’re spending 30 percent of your income on debt and are within the acceptable ratio for a mortgage.
Debt-to-Income Ratios can Vary
The 30-percent ratio is considered the golden rule of mortgage lending, but it’s not a hard and fast one. Lenders will also fund a mortgage that goes as high as 43 percent debt-to-income ratio. Some lenders will go higher, although the mortgage may not be what is known as a Qualified Mortgage. A Qualified Mortgage is one where the lender followed the ability-to-pay rule. In other words, the lender determined that the borrower is considered low-risk and is capable of repaying the mortgage. Getting a Qualified Mortgage from a Philadelphia mortgage company gives both you and the lender beneficial protections and helps you avoid predatory lending practices.
Stick to a Lower Debt-to-Income Ratio
Many lenders offer higher debt-to-income ratios as a way of creating a higher pool of qualified borrowers. It’s beneficial for those who want to own an asset instead of renting, but carry a bit too much debt for a lower debt-to-income ratio. However, stretching your ability to repay a mortgage may not be a good strategy if worse comes to worst and you lose your job. Play it safe and stick to a lower debt-to-income ratio instead of stretching your income to get into a more expensive home. Taking out a lower mortgage payment will help you make it through a period of unemployment and prevent you from losing your home.
Exercise Fiscal Responsibility When Buying a Home
Chances are you pre-qualified for a mortgage before looking at homes, or you have a good idea of how much home you can afford. In the latter scenario, you won’t know how much your mortgage will be prior to talking to a Philadelphia mortgage company. And if you’re pre-qualified, you know how much you’ll pay each month towards a mortgage. Avoid reaching your maximum monthly payment even if you feel you have a bright financial outlook.
Home buyers frequently make the mistake of going for the max monthly mortgage payment and loan in order to purchase a home. They wind up having almost every dollar of income spoken for with little to spare in the event of an emergency. Just because a lender offers you a high debt-to-income ratio doesn’t mean you should take it.
Talk to a professional at a Philadelphia mortgage company about the ins and outs of getting a mortgage including debt-to-income ratios. A mortgage professional can teach you about what you need to know about buying a home, the types of mortgage that are available to you, and how much home you should buy.