To be able to negotiate for the best loan, you want to have control over your debt so you can work from a position of strength. To do this, you need to know your financial condition and how to make it stronger.
Do You Have More Debt Than Income?
While applying for a mortgage loan, lenders want to know how much debt you pay every month. This includes regular monthly payments for auto loans, credit cards, college loans and similar personal debt. They also add an estimated mortgage payment, which covers principal, interest, taxes, insurance, homeowners association fees and private mortgage insurance fees, to get a monthly total.
Next, the monthly debt total is divided by the monthly pre-tax income. Lenders and realtors call this number a debt-to-income (DTI) ratio and prefer no higher than 36% of pre-tax income spent on debt.
What To Do If Debt Is Too High
If your DTI is over 36%, lenders might suggest a smaller loan. It’s also possible to add more debt or choose higher payments depending on what the lenders require. To obtain the loan you really desire, it’s important to discover how to decrease your debt-to-income ratio.
Lowering Debt Ratio
Here are several ways to lower a debt-to-income ratio.
- Pay down credit card balances and personal loans.
- Ask credit card companies to lower your interest rate.
- Lower how much you will pay on a monthly mortgage payment
- Increase your income with part-time work or family member’s income
When you understand your financial condition, you’re ready to make a plan to reduce your expenses.
Strategy To Reduce Debt
Line up all your loans and cards by the highest to lowest interest rate. Take note of how much you pay monthly, for interest alone. Then, create a budget to aggressively pay off the card with the highest interest without reducing savings. Develop a realistic budget and follow it. Look closely at your living costs to see what you can cut back on.
By keeping track of debt, you can lower your debt-to-income ratio and achieve a stronger negotiating position.
