Ever wonder the best way to gain more control of your debt? A low rate and payment helps, but discipline and smart income choices play an important role as well…
Income is a crucial component lenders look at when granting you a mortgage loan. It is the basis by which they are going to get repaid because a mortgage loan is not really a loan against the property; it is loan against your ability to repay. The dwelling is simply used as collateral in the event you default on the mortgage.
How Debt Factors In
Income and debt are the yin and yang, opposites of each other. On one end of the spectrum is debt which is a liability and income is the means to have choice and control, where debt is something that is predetermined. The more income you have, more power you have make those obligations go away giving you choice and control where your hard earned dollars end up.
This is precisely why it makes prudent financial sense to carry a debt to income ratio no bigger than 36% of your gross monthly income. While your lender might allow you to qualify for more house, try to exercise some restraint. Just because you can afford a $3,500 per mortgage payment or an $800 Tesla payment doesn’t necessarily mean you should.
The goal when borrowing mortgage money is to put yourself position where you can have a life and not be married to your mortgage, while still saving and contributing to the retirement bucket. Mortgaging your income by taking out debt or not reducing the cost of high debt already in place limits your future ability to borrow or save.
What Creditors Will Never Tell You
Mortgage Tip: always remember it takes $2 of income to offset every $1 of debt for a 2:1 ratio.
If you want that fancy Tesla at an $800 per month
Then get a raise or new job equivalent to $19,200 more income or cut a current debt payment of $800
If you want the dream house at $3,500 per month mortgage payment
Then aim your income to debt load at 36%. This means you would want income at $117k/year without carrying other consumer obligations, ideally.
There are however, justifiable exceptions that make exceeding the 36% debt allowance reasonable such as:
- you or your household income is poised to rise in the near future
- you will be able to cut another expense such as paying off in full or refinancing another obligation
- your mortgage payment will drop perhaps via refinancing in the near future
- you are coming into cash which you are going to make smart choices with
Additionally, more income:
- allows you to prepay your mortgage off faster
- allows you to qualify for more house when buying a home
- allows you to move into a shorter and more aggressive debt pay down structure such as a 15 year fixed rate mortgage while still saving
- allows you to pay off your credit cards in full every month rather than paying unnecessary and pricey interest assuming you’re making smart financial choices
- allows you to consume smart debt such as rental property generating even more income
- allows you to make investments generating more income
- allows you to save and plan for the future
When you are thinking about buying a home or refinancing a home you already own, today’s borrowing choices should be based upon what the future holds, not just right here in the now. By focusing on what the future holds and keeping your income as high as possible in relationship to your liabilities, you position yourself for not only having an easier time qualifying for mortgage financing, but lining yourself for a brighter future financially.
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