If your finding it difficult to secure financing for a mortgage, falling behind on mortgage payments or overwhelmed with the countless ways which are offered to overcome debt your not alone. There are many individuals trying to overcome the hurdles that limit your options to become a home owner, or remain in your home if your currently hold a mortgage.
Credit, Debts, Budgeting and Mortgages
Although there are many circumstances that contribute to debt it is the primary reason most families are unable to secure mortgage financing, or fall behind on mortgage payments and more often than not face the burden of foreclosure. Understanding how to manage your finances or budget was unfortunately not taught in most schools ( IE Class: how to budget 101), and therefore we are inclined to set our own guidelines in an effort to overcome the burden of debt.
Unfortunately many of the institutions lending you money understand how to entice you based on your spending behavior, which in most instances means the accumulation of more debt…
As an example; Have you ever been offered the option to increase the spending limit on your credit card! Did you consider why the lending institution has presented you with this option? There is a good change your credit score has not gone down and has likely improved, and your payment history is in good standing, therefore the lending institution is comfortable offering you the option to spend more of their money. It is easy to get sucked in to this promotional hype since the short term thought is you have access to more money. However increasing your spending limit can also mean you will carry a greater financial burden and therefore have less income available to you, since you will be paying back credit card debt, plus interest. This brings up another interesting point, since the lending institutions are offering the option to increase your spending limit why don’t they offer the option to reduce the interest rate on the funds or burrowed money?
Although it may seem like a simple step, it is advisable to occasionally call your credit card company to ask for a reduction on the interest rate you are paying, especially when you receive promotional offers to increase your spending limit.
Debt: Gross Debt and Total Debt service
To have a greater appreciation for debt and how it effects your ability to carry a mortgage there are some great websites that offer valuable information. Here is a simple overview to give you some insight in to the process;
- Gross Debt Service (GDS) Ratio is the percentage of your gross income that is required to cover housing costs: Your GDS should not be higher than 32%.
The costs considered are:
condo fees (50%)
As an example, if you had a gross monthly income of $4,500 and were applying for a mortgage, the bank would look at the $1,000 mortgage payment, $200 property taxes and $150 heating expenses. This $1,350 divided by $4,500 is 30%.
- Total Debt Service (TDS) Ratio is the percentage of your gross income that is required to cover housing costs and any other debt. Your TDS should not be higher than 40%.
The costs considered in TDS include:
credit card payment
credit line payment
car loan payment
Continuing with the example above, if you add a $100 credit line payment and a $300 car payment to the $1,350 housing costs, the bank would calculate $1,750 divided by $4,500. The TDS would be 39%.
It’s important to understand that your TDS is added to your GDS to arrive at a combined final number (These ratios are not considered separately). Since your GDS is under 32%, and TDS is 39% it is considered acceptable to most lenders. However there is another item known as your credit score which must also be considered to determine if your are a credible applicant, along with verification of information such as employment status and annual income.
Understanding this step will help to establish the reason why budgeting is an essential part of successful home ownership, which we touch on in our budgeting guideline.