Whether it is paying off for a student or credit card loan, paying off debt is the norm rather than the exception these days. Regardless of what type of debt it is, being in debt can throw a monkey wrench in the works, as far as savings plan are concerned. However, with proper planning and if you are willing to line up your ducks, it is possible to save for a house while paying off debt. Before doing so, the first order of the day is to sit down and ask yourself some questions. If need be, take a pad and pencil and start jotting down what exactly needs to be done. Obviously, this question and answer session will differ from person to person. In general, the questions you need to ask yourself about down payments should look something like this:
- The average mortgage payment per month is around $750. Is this affordable?
- Down payments are expected by most lenders and the average amount is 20% of the houses total value, depending on the area
- What is the current property value in the area where you are looking for a house?
- Don’t forget the maintenance of the house. Will you be able to afford expected and unexpected repair costs? A good number to use when figuring out maintenance cost is 1% of the home’s value
- How does your credit score look? Interest rates are directly influenced by credit scores. If it’s on the low side work on bringing it up before thinking about purchasing a house
- Last but not least, how long are you planning on staying at the new house? Most industry watchers recommend you stay at least 5 years to make it financially worthwhile
Time to Start Thinking About DTI
Once you have done your due diligence and have decided that you may be able to save enough and buy a house at the same time, the next step is to approach the banks. Finding out whether you qualify for a mortgage is the first big step. Once you sit down with the fiancé department, they will be able to look at your income, credit score and any other key factors, to decide what you can afford. One of the first things they will look at is your DTI score. DTI stands for the debt-to-income ratio. If you score well in this rating, then you have a higher chance of getting a loan. Apart from loan approval, the DTI will also influence interest rates.
Keep in mind that there are two types of DTI; the front-end and back-end ratio. The Front-end ratio is also known by another name which is the housing ratio. The housing ratio shows how much of your income can be taken for housing-related expenses. These expenses include insurance, HOA fees, mortgage, and taxes. The back-end ratio includes the non-housing related expenses, but mostly debt-related costs. This could be car loans, credit card debt, student loans, child support, etc.
DTI by the Numbers
So, what is a good number to have when calculating DTI? Ideally, your DTI number should be at or below 42%. In fact, many lenders put the maximum at 43% before they will even look at anything else. You can calculate your DTI if you want, just to get an idea of where you stand. The way it is done is by adding up all your current monthly payments and then dividing that number by your monthly salary. If you get a number at or below 0.4, then you are good to go.
To Purchase or Not to Purchase
If you are still on the fence regarding buying a house, then keep in mind that there are benefits to saving up and buying a house. If you are currently renting a place to live, especially in an area where rates are high, it can make more sense to buy a house. In some areas, rent payments can be equal to or higher than a mortgage payment. Once you buy your new home, think of it as an investment. If the neighborhood is showing a general trend towards growth, then your home will be worth more as the years go by. Due to rising property value, you may also be able to tap into this equity by refinancing mortgage payments, which in turn means refinancing other debt payments.