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 “28/36 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 $300/month 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 28/36 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 28/36 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 28/36 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.

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With the struggling economy and home foreclosures at their highest ever, those of you who are in the market for buying a new home for yourselves or as an investment have unprecedented opportunities to save. Even if you are limited as to how much you can spend, you might be surprised at how much you can save on pre foreclosure homes (also referred to as default homes). Here are some pros and cons to consider when purchasing these types of properties.

The easiest part of the whole process is finding pre foreclosure homes. You can locate these on the internet through local listings (as by law they must be listed publicly) or on one of the many sites that are specifically designed to help those who are searching for homes in the foreclosure or pre foreclosure process. While it is easier to find foreclosures, one of the benefits of zoning in on a pre foreclosure is that you would probably be able to move into the house fairly quickly because not enough time has passed for the house to go into a state of disrepair.

Another advantage of purchasing a home in the default or pre foreclosure phase is that, often, the homes are actually listed by real estate agents. So, you would go through the “normal” home-buying process instead of having to deal with a possibly lengthy foreclosure hassle. In the pre foreclosure stage, you can actually take a look at the house and communicate with the home owner through the real estate agent. You do need to keep in mind that the homeowner will most likely be upset about being forced to sell his/her home. That is why buying a pre foreclosure through a real estate agent can turn into a real advantage.

Be aware of the negative aspects of buying a home in the default stage as well. maybe the biggest one is that you will not get a huge discount on the property as you may get in actual foreclosures. Usually the realtors handling pre foreclosures will list the homes closer to assessed value compared to those properties that are listed privately. Remember that a portion of the buy price goes into their commission, so it’s only natural that they will attempt to sell for as much as possible. Evaluate your bargaining power as well when you are discussing the deal with the agent/homeowner.

In general, pre foreclosure homes are on the inexpensive side, but you will most likely save more if you negotiate directly with the seller. Here time is on your side because homeowners that are suffering through pre foreclosure stage are under a great deal of pressure to sell before their home enters foreclosure. If their house does end up being seized by the lender, their credit rating will take a serious hit. And some homeowners may offer you an apparently too-good-to-be-true deal just to clear up their debt before they actually lost their home. The obvious disadvantage in this situation is that dealings with the upset homeowner will probably not be pleasant.

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Are you are homeowner who wishes that your home was a little bit different, more exciting, or more attractive? Although a large number of homeowners are more than happy with their home, there are others who want more. If you are one of those homeowners, it may be time for a change. Despite what you may believe, that change doesn’t have to involve buying a new home, it can involve a simple remodeling project, such as a bathroom remodeling project.

When it comes to bathroom remodeling, there are many homeowners who wonder whether or not it is a good idea. If you are wondering that, it is advised that you take the time to familiarize yourself with some of the most common signs that your bathroom could use a remodeling. If any of the signs, which will be mentioned below, sound alto familiar then it may be time that you start thinking about remodeling your bathroom.

One of the most obvious signs that you should remodel your bathroom was mentioned above. That sign is unhappiness. Whether you are unhappy with the overall appearance of your home or just the bathroom, a bathroom remodeling project may be able to offer you assistance. If you do make the decision to remodel your bathroom, you will find that you have a number of different options. You could easily remodel a small portion of your bathroom, such as your bathroom toilet or sink, but you could also change everything around. In fact, the choices that you will have are just one of the many benefits to remodeling your bathroom; you have the complete freedom to do whatever you want.

In addition to just not liking the way that your bathroom looks, there is also a chance that it may be unsafe or in poor condition. Whether you have developed a mold problem or if your bathroom is falling apart, you may not only want to think about remodeling your bathroom, but you may actually need to. Since the bathroom is often considered one of the most used rooms in a home, there is a good chance that you, as well as anyone else who lives in your home, will use it multiple times a day. Loose bathroom floor tiles, mold, and other bathroom problems can not only look unattractive, but they can also be dangerous. Therefore, if your bathroom can be considered unsafe, you may want to think about having your bathroom remodeled.

Another sign that you may want to think about remodeling your bathroom is if you are looking to sell your home. In almost all cases, bathroom remodeling projects help to increase the overall value of a home, especially if the bathroom was previously in poor condition. Although you are not required to remodel your bathroom before you sell it, it may be a good idea. For more information on whether or not a bathroom remodeling project can increase the profits that you will see when selling your home, you may want to speak to a real estate agent. You will find that in some cases it is worth to remodel your bathroom before selling, but others times it isn’t.

The above mentioned bathroom remodeling signs are just a few of the many that exist. In all honestly, it doesn’t really matter whether you need to remodel your bathroom or not, all that matters is if you want to. If you want to remodel your bathroom, go right ahead; there are a fairly large number of benefits to doing so.

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home loans make the process of buying a new home more affordable than ever. As you may already know, these types of loans give you many opportunities that wouldn’t be possible without them. When you buy a home, you should understand as much as you can about the process, as well as the questions you will be answering. This way, you’ll be familiar with how things work and you’ll find the entire process to go much smoother.

When you look towards a home buy loan, you’ll need to fully understand the interest rates. They are never the same and will vary among the different financial institutions, as well as from time to time. In many cases, home loans can change on a frequent basis, with little to no notice. When you buy a home, it is very important that you keep up with the economy. Any change in interest rates for a home loan can either increase or decrease the amount you pay back.

When getting a home loan, you’ll also need to understand the terms and the length of the loan. Almost all financial institutions and lenders have a variety of different plans or periods for you to choose from. If you choose a longer period, in most cases your interest rate will drop. You can find this out yourself by using a mortgage calculator. This way, you’ll know how much your mortgage payment will be before you decide to further pursue the loan.

As you probably already know, your ability to pay the loan back is very important. Some lenders require that you keep your loan full term, while others may provide you with the option to pay it off any time you wish. home loans that give you the option to pay it off early will usually save you quite a bit of money in the end. If you are able to pay your loan off several years early, you’ll save a lot of money in the long run.

Even though the early payoff option is great to have, it can also come back to haunt you if you end up defaulting on the home loan. Or, if you decide to sell your home in the future, the early payoff can haunt you as well. For those very reasons you should always consult with a specialist before you commit to any type of home loan.

For the potential home buyer, home loans offer several different opportunities. Before you rush out and get a home loan, you should always know what you are agreeing to. You should also look into the company you are thinking of getting the loan from as well, so that you can better prepare yourself when you go through their process of getting your loan.

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