You need to know some of the elements that could be a reason for the bank to deny a mortgage application. The debt-to-income ratio is an important one that can impact the approval of your mortgage.
Having credits with banks doesn’t always mean that they are going to approve your application. Even if they notice you pay in advance to lower your liabilities, it’s not something sure.
If you feel your credit history is good and you feel confident about it but suddenly the bank denies an application for other credits, you need to stop and really think about what is happening and ask yourself if you are managing your money well to cover the mortgage payments.
Assets vs. Liabilities
Inside the assets we have: the cash, referring to your salary, your checking accounts and your savings; then, they would want to know if you own another property, a car or any other stocks and also, a life insurance with cash accumulation.
Liabilities are the financial responsibilities that you have with your bank. They will calculate how much of your assets are compromised with your liabilities. These liabilities are: mortgages, credit cards and personal loans.
When it comes to a Mortgage, numbers are numbers
The numbers that they are looking to see are actually monthly numbers. The bank wants to know how much of that money that you consider as assets are going towards any debt that you have. This is an important section because it can either make or break your mortgage.
You need to add up all the money that you consider assets. For example: $3.000 as salary, $3.000 on stock investments, $2.000 on real estate equity if you have one and $1.000 in life insurance cash accumulation. That’s a total of $9.000.
In liabilities, we have, e. g.: A mortgage with a minimum payment of $1.300 every month, a credit card with a $150 minimum payment and another credit card with $50, and to close this list, a personal loan with $200 monthly. This represents $1.700 in liabilities.
If you pay more than the minimum required, the total liability for that month, of course, is going to be higher. Let’s say you pay $600 more in that month, the liability will be $2.300 and then this is when the debt-to-income ratio changes. You have to divide the liability quantity of that month by the total of assets: $2.300 divided by $9.000. That gives us a result of a 26% debt-to-income ratio. What happens if you only do the minimum payment, which is 1,700 divided by 9,000? When you do that, you get a ratio of 19%.
The difference is noticeable. Who do you think the bank is going to favor more? Well, in this case, the client with 19% is more likely to get it because the possibility of paying the mortgage is higher than the one with 26%
Debt-to-Income Ratio: A very important aspect of a mortgage
There is a big chance the bank is going to favor those who have less liabilities to worry about because this type of clients are more likely to make the mortgage payments versus someone who has a hard time managing the debt they have acquired.
By law, you are required to pay the minimum payment. What the bank cares is that you make the mortgage payments. You are not required to pay additional money. That’s up to you.
Remember you need to show them you can manage your debt efficiently. Lesson learned!
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