How to Know When You Can Afford a House

How to Know When You Can Afford a House

Why do I Need to Know DTI?

There are several factors in determining if you are ready and able to afford a new home. The easiest way to start is by figuring out your debt to income ratio (DTI). Calculating DTI is where financial lenders usually begin. Knowing your debt to income ratio will help you discover if you are in a financially sound position take on the liability of owning a home. It helps the lenders know if you have enough wiggle room in your budget to make your house payments. Keep in mind that the DTI is not the only aspect of an individuals finances that lenders look at to determine creditworthiness. They also look at things like your credit score, income sources, assets, and sometimes references.

How to Calculate Debt to Income Ratio

To calculate your DTI, you need to know the total amount of all your debts on a monthly basis. Your total debt includes all loans such as car loans, student loans, personal loans, and private loans (like from family). You also have to add any credit card debt no matter how big or small as well any outstanding medical bills.

Then you need to know the total amount of gross income you have from employment, self-employment, odd jobs, social security, retirement and any other sources of income including child support or alimony. Gross income is the amount of income before taxes and insurance.

Next, you divide the total amount of debt by the total amount of income and multiply by 100 to get a percentage.

DEBT / INCOME X 100 = DTI

As an example:

Let’s say your total amount of payments that go toward debt adds up to $1,690, and total gross income is $2,500 per month.

$1,690 / $2500 = 0.676 x 100 = 67.6%

In another example let’s say your total debt payments were $850 and your gross income was still $2500 per month.

$850 / $2500 = 0.34 x 100 = 34%

As you can see in the examples the less debt you have, the smaller your DTI which is a good a thing. On average lenders like to see a DTI less than 28%. This basic DTI calculation referred to as the front-end ratio.

What about all the other monthly expenses?

You could do the same calculation and include all your monthly expenses such as utilities, groceries, gasoline, and so forth add it to the debt side of the equation. This calculation is called the back-end ratio. This ratio will be higher because it takes into account all of your monthly expenses in addition to your debt. Again the lower the ratio, the better it looks to a lender, and you will have the confidence to know that you can comfortably afford a home rather than squeaking by paycheck to paycheck. A back-end ratio of 36% or less is a good number to strive for when deciding if you are ready and able to buy a home.

Which DTI ratio is more valuable?

Lenders typically look at both the front-end and back-end ratios. Usually, the back-end ratio holds more weight because it takes into account all your expenses. The only drawback is DTI is based on gross income and not net income. Net income is the actual amount of money we get from our paychecks to spend, after taxes and insurance.

If you wanted to know for your purposes what your DTI would look like using your net income merely plug in the net monthly income into the formula instead of gross monthly income. If your DTI still comes out below 36%, then you are in good shape and ready to move onto the next step of deciding if you can buy a home, which is checking your credit score and cleaning up your credit.

Tips for lowering your DTI

The higher your DTI ratio, the more likely you are going to encounter difficulties in qualifying for a mortgage loan. You will also be more likely to struggle to make ends meet. If your current DTI is too high, don’t apply for a mortgage yet. There is no shame in waiting another year while you pay down your debt before applying for a mortgage. Getting your finances in order so you can present yourself as someone with good credit is better than representing yourself as someone with more debt than they can financially handle.

Ways to lower your debt-to-income ratio:

1. Don’t take on any more debt than you already have
2. Don’t make any significant or major purchases on credit before you buy a home
3. Pay off as much of your current debt as possible before you apply for a mortgage
4. Make more money – either a second job or a higher paying job
5. Cut your unnecessary expenses, at least until a large portion of your debt is paid down
6. It’s good to know

Even if you aren’t trying to decide if you are ready to buy a home, knowing your DTI is an excellent thing to remember in general. It gives you an overall idea of where you stand within your budget. It’s a bigger picture of whether or not you are spending your money wisely or blowing it all on debt. It is a beginning step toward getting a handle on your finances so you will be prepared to be a homeowner when the time is right.

Cherokee County Banks

Cherokee County Banks

When it comes to buying a home or property there are a few options for paying for the most important purchase of your life.

Option 1: Paying Cash

Paying cash is not the most common way for people to pay for a home or property but it by far the safest and most secure. Paying cash for a home or property means you will have to save up the money or come into some money in some way such as an inheritance.  Even if you can’t pay cash in full for a home having some cash on hand for a healthy down payment on a mortgage is always a great help in getting approved for a mortgage.

Option 2: Renting to Own

Renting to own is an option for purchasing a home. It has some advantages if your is not the greatest and are set on purchasing a home before getting your credit score in order.  The major disadvantage is that the payments made to the seller directly don’t get reported to help you improve your credit score. The interest rate charged by the seller may be higher than current interest rates.  A buyer needs to make sure that the purchase contract is fair for both sides of deal.

Option 3: Getting a Mortgage

Short of paying cash getting a home mortgage is a good alternative. It is important to have your credit score in good order, your other debts paid off or very close to being paid off, and having at least 20% down payment helps the process a great deal. However, there are some no downpayment options available. For those options, you would have to speak a loan professional at the bank.

Cherokee County, Iowa has several financial institutions to choose from.
For your convenience, we have listed them here in alphabetical order.

DISCLOSURE: Delta Properties does not endorse any one bank over another. It is the buyer’s responsibility to investigate which financial institution is the best fit for their home mortgage needs.

Central Bank 401 W. Main Street Cherokee IA 51012 712-225-2546 https://www.centralbankonline.com/
Cherokee State Bank 212 W. Willow Street Cherokee IA 51012 712-225-3000 https://www.cherokeestatebank.com/
Farmers State Bank 106 E. Cedar Marcus IA 51035 712-376-4154 https://www.fsbmarcus.com
Heritage Bank NA 148 Main Street Aurelia IA 51005 712-291-3646 https://www.heritagebankna.com
North Star Community Credit Union 1030 S. 2nd Street Cherokee IA 51012 712-225-5731 https://www.nsccu.org/
State Savings Bank 200 S. 2nd Street Cherokee IA 51012 712-225-6117 https://secure.yourfullservicebank.com
State Savings Bank 719 S. HWY 143 Marcus IA 51035 712-376-2434 https://secure.yourfullservicebank.com
United Bank of Iowa 111 E. 2nd Street Aurelia IA 51005 712-434-2291 https://www.unitedbk.bank
United Bank of Iowa 101 N. Lewis Avenue Cleghorn IA 51014 712-436-2222 https://www.unitedbk.bank
United Bank of Iowa 100 W. Pine Street Marcus IA 51035 712-376-5511 https://www.unitedbk.bank

The agents at Delta Properties are here to help in any way we can. If you have any questions regarding your real estate needs don’t hesitate to Contact Us. We are happy to help!

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