It’s a done deal. You’ve spent time doing research about the West Bank real estate market. You’ve found the right West Bank REALTOR. You’ve negotiated the best possible price and terms on your new house and you are impatiently waiting to close and move in.
What do you do next? Go shopping for furniture and curtains and towels and paint, right? WRONG.
I know you are excited about the prospect of decorating your new home and making it reflect you, you, you. But all of that shopping could backfire on you when your lender verifies your credit information before the closing.
Why would your lender check your credit again?
Well, before they are willing to finance your home purchase, your lender has gone to the trouble of making sure that you are gainfully employed, verified your income and that you can afford to make the monthly payments. After all, they want to be repaid and the only way they can reasonably assume that will happen is to qualify you. They use many different formulas for determining what type and how much of a mortgage you can afford, including what is called a debt to income ratio. Basically, it’s a formula that calculates the maximum amount of monthly mortgage debt you are allowed to have in relation to your income.
From Wikipedia:
Two main kinds of DTI
The two main kinds of DTI are expressed as a pair using the notation
x/y(for example, 28/36).
- The first DTI, known as the front ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (PITI includes mortgage principal and interest, mortgage insurance premium [when applicable], hazard insurance premium, property taxes, and homeowners’ association dues [when applicable]).
- The second DTI, known as the back ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.[1]
Example
In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:
- Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.
- $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
- $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.
Your lender calculates your debit to income when you apply for a loan, but what many people don’t realize is that most of them run an updated debit to income calculation in the days leading up to your closing.
Now, suppose you ran out and charged a new sofa here and some new linens there and ordered the new blinds from that cute shop around the corner. If you were close to the maximum DTI allowed by your lender, you may have just disqualified yourself from buying the very home those new things were supposed to be used in.
To avoid any problems, it’s better to wait until you have the keys in your hand before you go on that new home shopping spree. Even then, it’s smart to keep your monthly budget in mind. No one wants to be house poor, spending all of their time working to pay a mortgage.
Maybe Aunt Martha’s floral sofa will fit quite nicely against that wall after all.
For more information about buying a home in New Orleans or on the West Bank, feel free to contact the West Bank Living Team. We live, work and play here and would love to welcome you to our community.
