Preparing Your Finances For Home Loan Application
I’m in the process of applying for a home loan and I have learned more about finances—and particularly my finances—in the last two weeks than I have learned my entire life. In some ways, it’s been a blessing. Wanting to finally buy a place with my partner forced me to research and understand money matters that I knew nothing about before. In another way, it’s been frightening and frustrating. When you finally see the light, you realize how much in the dark you were before. How did I go so long without knowing these basic and important facts about money—both money at large and my money? I work hard. I pay my bills on time. I have a bit saved. I figured we could walk into a bank and apply for a loan yesterday. It turns out we are months out from being able to apply for a home loan, if we want the result to be in our favor. Here’s what you should know about preparing your finances for home loan application.
What is your debt to income ratio?
You may believe that if you make a lot of money, you should get a loan—no problem. But the bank wants to see not just how much you make, but also how much of that you spend. This is called your debt to income ratio. Someone who makes $7,000 a month but spends $5,000 isn’t a very desirable applicant. The bank doesn’t believe that person will be able to pay his mortgage of $2,300 a month reliably. So look at your debts: credit cards, auto loans, student loans, individual insurance plan if you don’t get one through work. There could be a lot. When that adds up, what percentage of your actual income is left? That’s what the bank is looking at.