When reviewing loan applications, lenders place the greatest focus on debt-to-income ratios. Your debt-to-income ratio determines how much disposable income you have each month after paying your bills. Even with a high credit score and a significant amount of money coming in, you can still have a hard time getting approved and ultimately lose out on that Irvine home for sale you’ve been eyeing. If the majority of your earnings are already earmarked for other bills, lenders know that managing new debt could prove challenging. Following are several loans that can impact your buying potential.
1. Car Loans
Timing is important with car loans. A car loan that is secured well in advance of your decision to buy a house can actually have a positive impact on your purchasing power and your ability to get new funding. This is only true, however, if car payments are always remitted on time and if the loan is paid in full before you submit your loan application. Late payments and missed payments will lower your credit score and your chances of getting a home loan approval. When calculating your debt to income ratio, lenders will check to see that no more than 43% of your total income is already allocated for other living expenses. Car loans and the mandatory, comprehensive coverage that these entail could account for a hefty portion of this amount.
2. Student Loans
Most school loans are long-term obligations with payments that are entirely manageable. Many students, however, wind up financing their educations by working with numerous lenders. Together, their student loans can have a cumulative and negative impact on their purchasing power, especially if the interest rates for these products are high. It is important to note that government-subsidized loans will have a far lesser impact on your ability to get a home loan than will student loans from private lenders. Loans from private lenders often have significantly higher interest rates and far less flexible terms.
3. What Buyers Should Know About Loan Pre-Approvals
Car loans and student loans can have adverse effects on your efforts to secure a mortgage loan, even if you have secured these products well in advance of your home loan application. Buyers should know, however, that seeking new funding products immediately after a pre-approval letter has been received could also derail the purchasing process. Pre-approval letters do not mean that funding is absolutely guaranteed. If underwriters discover new debt before the loans are actually written, they could lower the amount of funding that they’re willing to extend, based on new debt-to-income ratios. Thus, purchasing a new car or opening a line of credit at a local furniture store are decisions that could work against you depending upon their timing.
Don’t navigate the home buying process blindly–let Irvine Residential Living help. We can guide you through each step, from getting your finances in order to closing on your dream house for sale in Irvine. Give us a call today at (714) 454-6304 and schedule an appointment with one of our experienced agents.