How Your Debt-To-Income Ratio Is Holding You Back
Many people think a down payment is their biggest hurdle to homeownership, but it’s not. On this week’s episode we discuss the debt-to-income ratio and how it’s keeping renters from becoming homeowners. Check out the full episode and if you have questions about how to get started with Homeowner Prep, be sure to reach out to us or drop your question in the comments.
What You’ll Learn from this Episode:
- What The Debt-To-Income Ratio Is
- How To Increase Your Income
- How To Pay Down Your Debt Quickly
- And much more!
00:00 The Biggest Hurdle In The Home Buying Process
00:38 Welcome To The Homeowner Prep Podcast
01:11 What Is A Debt-To-Income Ratio?
01:32 What Is The Ratio Needed To Qualify?
02:13 Let’s Break Down An Example
03:37 So What Are Your Options?
03:55 Option 1: Earning More Income
04:46 Option 2: Pay Down Your Debt
05:18 Recent Statistics On Debt
05:48 Why Is Credit Debt Becoming A Bigger Issue?
06:38 Recent Trend Impacting Millennials
07:15 A Temporary Credit Card Solution
07:53 We Live In The Gig Economy, Take Advantage
08:13 Getting Started With Homeowner Prep
08:31 Connect With Us On Social Media
“Creating a plan is so much better for you because now you have a vision of what you want to do and how you’re going to get there.”Eric Hellon
Full Episode Transcript:
Most people think that a down payment is the biggest obstacle holding them back from buying their first home, but it’s actually your debt-to-income ratio. So on today’s episode, we’re going to talk about what that is, how it’s holding you back, and how to overcome it to buy your first home.
Welcome to the Homeowner Prep Podcast where every week we educate and encourage inspiring homeowners to help them buy their first home faster. If you aspire to own a home, you’re in the right place, so enjoy. Do us a favor and leave a review, a rating, and be sure to subscribe. Now, let’s get to this week’s episode.
Hello, and welcome to another episode of The Homeowner Prep Podcast. I’m your host, Eric Hellon, and on today’s episode, we’re going to be talking about the debt-to-income ratio and how it may be holding you back from buying your first home.
I know most people think that their down payment and saving money for closing costs is really the biggest hurdle that they have when it comes to buying a home, but the truth of the matter is, your debt-to-income ratio is actually the biggest thing holding most people back, and they don’t even know what it is. So let’s start there…
What is a debt-to-income ratio? When you go to take out a loan for a mortgage, they’re going to look at all of the income that you have coming in and all of the debt that you have going out, and based on those two numbers, they’re going to create a ratio. Now, that ratio has to fit into a certain criteria based on the loan program that you qualify for. So most loan programs are looking for about 43% as your debt to income ratio, but some will go as high as 50%.
What it’s looking at is not only the credit card payment, student loans, and any other debts that you have, but they’re also going to take into account the new mortgage payment that you’re going to have based on that loan approval. So with your mortgage amount and your current debts, all that totalled together has to be a percentage of your total income.
The good news is they’re actually going to use your gross income, not your net, which makes a big difference. If you’ve ever looked at your paycheck, there’s a big difference between your gross income and your net income. So let me give you an example. Let’s make it simple.
Let’s say you’re making $10,000 a month. You’re making $120,000 a year gross. Now your debt, let’s say you’re qualifying for an FHA program, and they let you go up to 50%. Good. We have up to $5,000 that you can have in debt payments. Now, let’s say your new mortgage that you’re qualifying for is going to be $3,000 a month. Well, that now leaves you with $2,000 a month that you have for other debts. That includes your car payment, student loans, and all your credit cards.
When they look at your credit cards, they’re going to look at the minimum payments due every month and that’s how they’ll factor in those payments. When they look at your student loans, it can get a little bit interesting. Some lenders may use 1%, some may use a half a percent. If you currently have payments, then they’ll use that amount. So definitely talk to a lender and figure out if you do have student loans, how it’s going to be factored in to your debt-to-income ratio?
It may sound like $5,000 in debt is a lot. When we look at the statistics of today, we’re seeing that household debt and credit card usage is at an all time high. We’re seeing that average households have $59,000 in debt and if you live in the state of Utah, you actually hold the title for the most household debt at $79,000 on average per household.
So we have options and those options are to either pay down your debt or figure out ways to make more money. Again, this is a ratio. This is your income versus your debt and it creates a ratio that the lender is looking at to see if you can qualify to buy.
Now, when it comes to making more money, it can be a little bit more difficult because any new income that’s factored in has to be seasoned for a while before a lender will actually consider it in your loan qualification. What do I mean by that? Well, you need to have that income for at least a year, sometimes two years, in order for it to be considered. So when it comes to making more income to use to qualify to buy, it can be pretty tough.
But you should be making more money in order to pay down your debts. If you can earn additional income, then you can pay down any credit card debts and you can use that money to lower that debt obligation, and that way it does help you. So even though you’re not able to use the income right now, you can definitely use that money to pay down your debt and that’ll help you in your debt-to-income ratio.
Now, the other side of that coin is to simply pay down debt. And I know that’s easier said than done, but if you take a focus, vision and a plan to pay down your debt, create a debt snowball list of all of your debts and start to knock them out one by one, you’ll be better off than just saying that “Oh, I have this debt and I don’t know how I’m going to get out of it.” Creating a plan is so much better for you because now you have a vision of what you want to do and how you’re going to get there. So create a plan, reach out to us, and we can help you do that.
There are a few statistics that are alarming to us and one of those is the fact that credit card users are now carrying their debt over month-to-month, more this year than they’ve done in the past. So even last year when we looked at how many folks are carrying their debt over month-to-month and having a balance, it was at 39%. This year, in 2023 it’s at 46%. Which tells us that people are having a harder time paying off their debt every single month.
Why is that? Well, there’s a number of reasons. Number one is we went through a recent pandemic. People had to survive and a lot of them use credit cards in order to make that survival possible. So we get it. There was an unforeseen circumstance that required people to put more on their credit cards. So that’s reason number one.
Number two is we’re seeing inflation in our market. So things cost more, groceries cost more. Every single thing that you’re used to spending everyday cash on, you’re now putting on credit cards and so we’re seeing that carry over as well.
And the third thing is actually interest rates. Interest rates are higher. So again, that’s impacting your bottom line for your household and so we’re putting more on our credit cards than we have in the past.
So these are some alarming things that we see and we want to start to write that ship so you don’t set yourself up for failure.
Another recent statistic actually impacts a younger generation. Millennials right now have an average car payment of $700 a month. So car payments are a lot higher, which makes it more difficult for you to pay for the things that you need to pay for and so people are leaning on their credit card to pay for some of those items. With car payments being so high, we’re at a risk of seeing more repossessions in the future. So definitely if you’re having struggles paying your car payments or your monthly obligations, reach out to us so we can create a plan and get you on track.
Another solution, aside from earning additional income to pay down your credit card debt, is to actually take your credit cards and put them on a 0% transfer card. That means that they won’t charge you any money for you to transfer those balances over and a lot of times those new credit cards have no interest payments for twelve to 24 months. So you can take advantage of really paying down only on the debt and not paying interest on top of that debt.
We recognize that this is a temporary situation, but it could help you get on your feet, get caught up and get your debt-to-income ratio in a much better position.
To be honest, we live in the gig economy, which is a benefit. You can actually go out and quickly earn some additional income to pay down your debt and you can use the internet and YouTube to build on additional skills that you may need to have in order to earn additional income. So we can help you discover those things as well.
To get started with Homeowner Prep, text the word START to 619-848-3700 or visit us on our website at www.homeownerprep.com/start from there, you can set up an initial consultation and we can start to help you pay down your debt and improve your debt-to-income ratio.
If you just have a question or scenario that you want to run by us, feel free to reach out to us on any of the social media platforms. We tend to get the majority of our questions on our Instagram account @HomeownerPrep.
I hope you got some value from today’s episode in understanding the debt-to-income ratio, how it’s holding you back from buying your first home, and most importantly, some solutions to improve it so that you can get qualified to buy your first place. I look forward to providing you with some more great content on the next episode, and until then, be blessed.
If you’ve enjoyed this show and got some great value from it, please be sure to rate and review and if you’re checking it out on YouTube, please be sure to subscribe. That really does help us to continue the show and bring in some great guests to help you on your home buying journey.
Connect with Homeowner Prep:
Want to buy a house, but not sure how to get started? Visit our Start Page and we can help you, no matter where you’re at on your homeownership journey. If you enjoyed this episode of The Homeowner Prep Podcast, be sure to subscribe on iTunes and leave a review. It means so much to hear your feedback and we’d love for you to help us spread the word!