By John Marsett
Robert Kiyosaki has said that money is an idea. It seems to be something tangible, but it is not. Most people know about fluctuating rates of exchange, stock market ups and downs, and interest rates - but that's not what I'm talking about. For the purposes of this article, I want to talk about the amount of money you having coming in and the amount of money you have going out. And, more specifically, the amount of money you have going out that is used to pay your debts. What you have going out to pay your debts vs. what you have coming in each month is called your debt to income ratio.
Many people are introduced to this when it is time to buy their first home. They quickly learn about debt to income ratios. They quickly realize that those small credit card purchases, one or two car loans, maybe a line of credit, and a department store card can really make the debt to income ratio look bad. In other words, what percentage of your income is used to pay your debt? If you are looking for favorable interest rates and less paper work during the process, I would set a goal of 30% or less.
Now, it is true that many lenders will
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take all your debts, and your new home loan, and go as high as 40-50%, but to me that is simply asking for trouble. That kind of debt to income ratio leaves you no room for savings, disposable income, discretionary expenses, and emergency funds. If your ratio is above 30%, I would highly suggest taking another year before you buy your home and do two things: 1) increase your income. Even $300-$500 more per month can make a huge difference in your ratio. 2) Pay down those debts. Forget the minimum monthly payments and pay as much as you can. A little sacrifice never hurt anyone.
Don't apply for anymore credit cards. I would also avoid consumer credit counseling. You got into debt, now it's time to get out. In 12 months, it is very possible to increase your income by $300-$500, and reduce your debt expenses by the same. That would be a $600-$1000 swing, which would very likely result in a double-digit drop in your debt to income ratio. By doing this, not only will you have more freedom within your finances, but when it's time to buy your first home, you will get more favorable interest rates, allowing you to get lower payments and more house for your money.
John is a real estate investor and has helped many individuals get into their first home. He has helped people through lease options and finding qualified lending through mortgage brokers.
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