Preparing for a home purchase is crucial. Many buyers enter the market blindly. Thus, they are unaware of typical mortgage loan requirements. Even though several home loan programs are available which make is possible for many people to qualify for a mortgage, these programs do not guarantee a low rate on the loan. With this said, buyers with questionable credit may pay more for their mortgage.

When the time comes to buy a home, most buyers earn enough income to qualify for a mortgage. They may even have a nice cash reserve for down payment and closing fees. Yet, the buyer could have neglected to assess their debts, and determine whether buying a home is feasible. Income is important to the buying process. Before a lender will approve a loan request, they will need to ensure that the applicant can afford the payments. Lenders come to this conclusion after evaluating a borrower's income versus their current debts.

Excessive debts are detrimental to the home buying process. Prior to approving a mortgage loan application, lenders meticulously review a borrower's monthly debt service. The monthly debt service is the minimum monthly payments required on all existing debts (credit cards, auto loans, student loan, personal loans, etc.) Buyers with few credit accounts and low monthly payments are generally not affected. On the other hand, if an applicant has five credit cards at their maximum limits, and has a monthly minimum payment of $75 for each card, this could present a problem. Furthermore, if the same borrower has a monthly car payment of $450, a student loan payment of $150, and an installment payment of $100, their monthly debt service totals $1,075.

Naturally, if the borrower earns a huge salary the current debts will not affect loan approval. Then again, if the borrower in this scenario has a monthly salary of $2,000, mortgage lenders will consider them a risky applicant. Ideally, a borrower's monthly debt service should not exceed 36% of their income. A borrower who earns $2,000 a month should not have more than $720 allocated for debts. In this case, 54% of the borrower's income goes toward paying down debts.

Having a high debt-to-income ratio will not disqualify a borrower from obtaining a home loan. However, it may affect their odds of getting a good loan package. Buyers can remedy the situation by preparing in advance. Eliminating unnecessary debts, such as credit card debts, is wise before buying a home. If an auto loan payment accounts for a huge chuck of your salary, consider trading-in or selling the vehicle, and selecting a car with a lower payment. In some cases, this maneuver is enough to put a homebuyer below the 36% threshold.