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Posts Tagged ‘Credit Card Payments’

Your debt-to-income ratio (DTI) is a simple way of calculating how much of your monthly income goes toward debt payments. Lenders use the DTI to determine how much money they can safely loan you toward a home purchase or mortgage refinancing. Everyone knows that their credit score is an important factor in qualifying for a loan. But in reality, the DTI is every bit as important as the credit score.

Lenders usually apply a standard called the “2836 rule” to your debt-to-income ratio to determine whether you’re loan-worthy. The first number, 28, is the maximum percentage of your gross monthly income that the lender will allow for housing expenses. The total includes payments on the mortgage loan, mortgage insurance, fire insurance, property taxes, and homeowner’s association dues. This is usually called PITI, which stands for principal, interest, taxes, and insurance.

The second number, 36, refers to the maximum percentage of your gross monthly income the lender will allow for housing expenses PLUS recurring debt. When they calculate your recurring debt, they will include credit card payments, child support, car loans, and other obligations that are not short-term.

Let’s say your gross earnings are £4,000 per month. £4,000 times 28% equals £1,120. So that is the maximum PITI, or housing expense, that a typical lender will allow for a conventional mortgage loan. In other words, the 28 figure determines how much house you can afford.

Now, £4,000 times 36% is £1,440. This figure represents the TOTAL debt load that the lender will permit. £1,440 minus £1,120 is £320. So if your monthly obligations on recurring debt exceed £320, the size of the mortgage you’ll qualify for will decrease proportionally. If you are paying £600 per month on recurring debt, for example, instead of £320, your PITI must be reduced to £840 or less. That translates to a much smaller loan and a lot less house.

Bear in mind that your car payment has to come out of that difference between 28% and 36%, so in our example, the car payment must be included in the £320. It doesn’t take much these days to reach a £300month car payment, even for a modest vehicle, so that doesn’t leave a whole lot of room for other types of debt.

The moral of the story here is that too much debt can ruin your chances of qualifying for a home mortgage. Remember, the debt-to-income ratio is something that lenders look at separately from your credit history. That’s because your credit score only reflects your payment history. It’s a measurement of how responsibly you’ve managed your use of credit. But your credit score does not take into account your level of income. That’s why the DTI is treated separately as a critical filter on loan applications. So even if you have a PERFECT payment history, but the mortgage you’ve applied for would cause you to exceed the 36% limit, you’ll still be turned down for the loan by reputable lenders.

The 2836 rule for debt-to-income ratio is a benchmark that has worked well in the mortgage industry for years. Unfortunately, with the recent boom in real estate prices, lenders have been forced to get more “creative” in their lending practices. Whenever you hear the term “creative” in connection with loans or financing, just substitute “riskier” and you’ll have the true picture. Naturally, the extra risk is shifted to the consumer, not the lender.

Mortgages used to be pretty simple to understand: You paid a fixed rate of interest for 30 years, or maybe 15 years. Today, mortgages come in a variety of flavors, such as adjustable-rate, 40-year, interest-only, option-adjustable, or piggyback mortgages, each of which may be structured in a number of ways.

The whole idea behind all these newer types of mortgages is to shoehorn people into qualifying for loans based on their debt-to-income ratio. “It’s all about the payment,” seems to be the prevailing view in the mortgage industry. That’s fine if your payment is fixed for 30 years. But what happens to your adjustable rate mortgage if interest rates rise? Your monthly payment will go up, and you might quickly exceed the safety limit of the old 2836 rule.

These newer mortgage products are fine as long as interest rates don’t climb too far or too fast, and also as long as real estate prices continue to appreciate at a healthy pace. But make sure you understand the worst-case scenario before taking on one of these complicated loans. The 2836 rule for debt-to-income has been around so long simply because it works to keep people out of risky loans.

So make sure you understand exactly how far or how fast your loan payment can increase before accepting one of these newer types of mortgages. If your DTI disqualifies you for a conventional 30-year fixed rate mortgage, then you should think twice before squeezing yourself into an adjustable rate mortgage just to keep the payment manageable.

Instead, think in terms of increasing your initial down payment on the property in order to lower the amount you’ll need to finance. It may take you longer to get into your dream home by using this more conservative approach, but that’s certainly better than losing that dream home to foreclosure because increasing monthly payments have driven your debt-to-income ratio sky-high.

Unfortunately, throughout the years, more and more people are becoming victims of enormous credit card debts that they probably will never get paid off. It is a shame to know that so many people feel that they NEED so many things but realize the only way that they could possibly get those things is by using their credit cards, and they normally have plenty of them to choose from!

Credit card debt has increased drastically throughout the past several years and it does not look like many people are yet realizing just how bad this problem is. If you are struggling each month, trying to figure out how in the world you will ever have the ability to pay all of your credit card payments on time, then you should definitely continue reading this article.

It is very important for people to understand how dramatically credit card debt can affect your financial standing, or lack thereof. Credit card debt is one of the leading causes why an individual would end up having to file for bankruptcy or take out mortgage loans on their homes or other drastic things such as that. People become so caught up with trying to make purchases that are just not feasible, never considering how much it is going to cost them down the road, because of the enormous interest rates.

Start choosing to simply throw away all of those credit card offers that you get in your mail so regularly, trust me, you do not need anymore debt people! These credit card bills will continue adding up and the next thing you know, you are going to be skipping payments and when that does happen, be prepared for an outrageous monthly bill, which you know for sure there is no way you can afford it!

To all of you young adults that have not yet gotten in severe credit card debt yet, do not do it, do not let this endless cycle of unbelievably expensive debts take over your life. If you can start your adult life out without too many unnecessary debts, such as credit cards, your life is going to be much more enjoyable and much much less stressful.

Because of the fact that credit card debt has gotten so unbelievably out of hand, perhaps you could start a new trend and try staying clear from getting yourself into so much debt. So, start now by trying to focus on doing positive things to make your life easier and once you start achieving those goals, you are going to sleep much better at night and feel much more positive when it comes to every aspect of your life.

Be responsible for your actions and if you have gotten yourself into a tremendous amount of credit card debt, make those monthly payments or try working extra hours so that you can start doubling up your monthly payments or even paying some of them off completely.

It will take you on average between 25 to 30 years to pay off your credit card at the minimal amount. This will not do.

Make a list of all of your credit cards (including all consumer debt such as doctor bills, furniture stores and your home).

List the following in columns: the type of credit card, principle amount, regular payment amount, power down payment, interest rate, total number of payments left on the card, estimated payoff date. Put your list in order of how many payments are left from least to most. If you make a minimum payment of £55month on one of your cards until it is paid off in full, you then have £55month freed up to add to the minimum monthly payment for the next credit card. After you pay off the second card, the amount you were paying on that one can be applied toward the third card. By doing this, you will decrease the number of years required to pay off your credit cards from approximately 30 years to nine years.

Using this strategy, think about the other ways you can free up money. If you spend about £100 at Starbucks each month, think about spending that money toward your credit card payments.

Remember, money is emotional. We spend and make money based on emotional compulsion. Go back and see what you spent money on in the last week and how much you spent. It’s not how much money you make that matters, but how well you manage it that counts.