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TOWNHOUSE PURCHASE
I have a 705 credit score and zero late payments. I have a 16 year job history and make 80,000 per year. I also have a nine year rental history. I have the opportunity to purchase the townhome that
I’ve been renting but I’m concerned because my DTI is 48.5%. Do you think I will still get an approval? And if so, do you know if I will need mortgage reserves and if so approximately how much? I’m using a 401(k) loan for the down payment and closing costs. Any info would be appreciated! I’m so glad I discovered your website as there is so much valuable information to help educate first time homebuyers!
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2 Replies
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Measuring Your Home Purchasing Capability
Purchasing should not be an issue considering your 705 credit rating, $80,000 annual earnings, steady job, and 9 years of rental experience. However, there is a problem: your debt-to-income ratio, which I gave you, is 48.5%.
DTI Ratio Equity
DTI Explanation: A debt-to-income (DTI) ratio of 48.5% indicates that nearly half of everything you earn monthly is spent on paying off your debts or loans.
Pointer for Lenders: It is safe to say that the ideal DTI is less than forty-three percent on average. However, there are some circumstances where a high DTI is acceptable as long as:
- Credit score holds up (which is the case with you).
- You have a job that you can hold long-term.
- You have enough liquid assets.
While securing a loan with a DTI of 48.5 percent might seem difficult, it’s not impossible, especially in cases where the house being purchased is the one being rented, meaning consistency.
Mortgage Reserves
Reserves: Reserves in a mortgage context are the amount of cash left after closing. Some lenders may ask for unspent reserves to be kept in case of future needs where mortgage payments are an issue.
Typical Requirements: The amount of reserves required will depend upon the lender, but a rule of thumb is as follows:
- 1-2 months of mortgage payments for strong and lower DTI ratio borrowers.
- 3-6 month reserves might be advised for people with high DTI ratios or whose down payment is from non-traditional sources, such as a 401(k) loan.
Considering your DTI and the use of a 401 (k) loan, a lender may insist that you show a minimum of three months’ reserves.
What is a 401(k) Loan and How It Can Be Used to Pay a Down Payment
Pros and Cons:
To get necessary funds without seeking a downpayment assistance program or gift funds, a 401(k) loan is one way to pay the deposit needed.
Also, consider the consequences of borrowing from your retirement accounts and the penalties for not paying them back.
Next Steps
Get Pre-Approved: First, seek a mortgage pre-approval from a suitable lender. They will evaluate your background in more detail and explain your chances of getting a loan.
Discuss DTI with Your Lender: It’s important to talk to your lender about your DTI ratio and any compensating factors you may have. At this stage, they can tell you about your likely chances of approval and any additional requirements they may have.
Consider Improving Your Financial Profile: If applying is still some time away, look for ways that can assist you in reducing your DTI, for example:
- Bringing the existing debts down.
- Waiting for a while before purchasing to have more savings or less debt to service.
Prepare for Closing Costs: In addition to the down payment, ensure you have enough money to pay for closing costs, which are usually between 2% and 5% of the home’s overall price.
However, it’s clear that with a good credit score, verified income, and normal rental history, you stand a much better chance of getting a mortgage despite your high DTI ratio. Talking to a lender will help you understand the requirements and the further steps you need to take on your specific case. Good luck with the Philippines home purchase!
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Purchasing should not be an issue considering your 705 credit rating, $80,000 annual earnings, steady job, and 9 years of rental experience. However, there is a problem: your debt-to-income ratio, which I gave you, is 48.5%.
Equity
DTI Explanation: A debt-to-income (DTI) ratio of 48.5% indicates that nearly half of everything you earn monthly is spent on paying off your debts or loans.
Pointer for Lenders: It is safe to say that the ideal DTI is less than forty-three percent on average. However, there are some circumstances where a high DTI is acceptable as long as:
- Credit score holds up (which is the case with you).
- You have a job that you can hold long-term.
- You have enough liquid assets.
While securing a loan with a DTI of 48.5 percent might seem difficult, it’s not impossible, especially in cases where the house being purchased is the one being rented, meaning consistency.
Reserves
Reserves: Reserves in a mortgage context are the amount of cash left after closing. Some lenders may ask for unspent reserves to be kept in case of future needs where mortgage payments are an issue.
Typical Requirements: The amount of reserves required will depend upon the lender, but a rule of thumb is as follows:
- 1-2 months of mortgage payments for strong and lower DTI ratio borrowers.
- 3-6 month reserves might be advised for people with high DTI ratios or whose down payment is from non-traditional sources, such as a 401(k) loan.
Considering your DTI and the use of a 401 (k) loan, a lender may insist that you show a minimum of three months’ reserves.
What is a 401(k) Loan and How It Can Be Used to Pay a Down Payment
Pros and Cons:
To get necessary funds without seeking a downpayment assistance program or gift funds, a 401(k) loan is one way to pay the deposit needed.
Also, consider the consequences of borrowing from your retirement accounts and the penalties for not paying them back.
Next Steps
Get Pre-Approved: First, seek a mortgage pre-approval from a suitable lender. They will evaluate your background in more detail and explain your chances of getting a loan.
Discuss DTI with Your Lender: It’s important to talk to your lender about your DTI ratio and any compensating factors you may have. At this stage, they can tell you about your likely chances of approval and any additional requirements they may have.
Consider Improving Your Financial Profile: If applying is still some time away, look for ways that can assist you in reducing your DTI, for example:
- Bringing the existing debts down.
- Waiting for a while before purchasing to have more savings or less debt to service.
Prepare for Closing Costs: In addition to the down payment, ensure you have enough money to pay for closing costs, which are usually between 2% and 5% of the home’s overall price.
However, it’s clear that with a good credit score, verified income, and normal rental history, you stand a much better chance of getting a mortgage despite your high DTI ratio. Talking to a lender will help you understand the requirements and the further steps you need to take on your specific case. Good luck with the Philippines home purchase!