Before you purchase a home or any other large ticket item, you should look at your current finances. Do you already have a loan that you are paying off? If you do, you may already have significant debt, which can affect your ability to take on an additional loan.

Additional debt may be debt from credit cards, car loans and even student loans. All this additional debt can wrack up the amount of payments you make every month. What about your current income? Is your annual salary enough to cover your bills and save enough for a house? If all of these questions pertain to your situation, you may likely have bad credit as well. Bad credit does not mean you should pass by on buying a home.

Debt to income ratio is something to constantly be aware of when you want to buy a house. An income needs to be high enough that it will cover all monthly expenses. If your income is not high enough for the month, then it may be more difficult to secure a loan. How banks look at it, is that if you are already paying 2/3 of your income each month to bills and general living expenses. Any more than that, then you wouldn’t have enough money for a roof over your head.

Therefore is best as a general rule, income must be 3 times the amount that you would pay for a monthly payment on a home. It may not be fair to an individual if they are able to live comfortably if there living costs are higher than 1/3 of their monthly salary, but that’s what lending institutions generally use to qualify others for loans.

It is also in your best interest to put together a budget before you decide to purchase a particular home. Take note of your average monthly salary and decide if the house you are purchasing is feasible. Depending on the amount of savings you have in your bank account, you may be able to buy your favorite home despite having debt.

Money you have available in savings may also lower your debt-to-income ratio. If you have significant savings that can be put towards a down payment, then you would not have to borrow a significantly high loan. It is easier to qualify for a smaller loan if your debt is not outrageous and your income is satisfactory. However not everyone has enough in savings to cover a down payment on the house they want. If that is the case, then it is advisable to look at other options when you have a high debt-to-income ratio.

The simple answer is no.  If you cannot alleviate your debt or your debt-to-income ratio is less than stellar, there are still options available.

A sub prime mortgage is otherwise known as a bad credit loan. If you have bad credit due to having a high debt-to-income ratio, then you may consider a sub prime mortgage loan. You can apply for a specialized loan for bad credit situations. A specialized loan for bad credit is also commonly referred to as a sub prime mortgage. You do however need to make sure you qualify for a sub prime mortgage. A subprime mortgage in Arizona is easy to qualify for however, the only way to know for sure if you qualify for a specialized loan such as a sub prime mortgage is to speak with a professional lender.

The specialists at Level 4 Funding will help determine your credit situation and point you toward loan options that are best for you.

Dennis Dahlberg
Broker/RI/CEO/MLO