Your debt to income ratio represents the number of monthly expenses you have in relation to your monthly income. Lenders usually want this number to be no more than 50 percent of your monthly income. If you have a debt to income problem, this information is for you…
One of the ways to increase your debt to income ratio is to pay off the debt to qualify which, generally speaking, will give you the biggest bang for your buck. The other way that’s very popular to drive your debt to income ratio down is to get a co-signer. However, there is another way that a lot of lenders and most people don’t talk about it because it has a negative stigma in the mortgage industry and that’s paying discount points. Paying points mean that you are paying upfront overhead in order to secure a lower rate of interest and subsequently a lower monthly payment as a result. This discount point percentage is considered a non-recurring closing costs meaning it’s paid one time in conjunction with getting a new mortgage.
It might be as simple as paying a half a point or paying a full percentage point, the numbers will vary, but it can lower your interest rate from a .125 all the way up to almost a 1 percent in rate. A 1 percent reduction in your interest rate, depending on the amount financed, can improve your borrowing power in some cases $40-60k.
In some situations paying discount points is not an option, if your credit score is super low, e.g. sub 620 on an FHA loan for example, or you’re looking at a conventional loan with a 620 credit score. Both of those scenarios would be automatically representative of paying discount points with nearly every lender based on the interest rate you choose.
If you’ve been turned down by another lender or you think your debt to income ratio is too high, it might not be a bad idea to get a second opinion with an experienced lender who can walk you through the intricacies of mortgage finance. Paying an extra premium in discount points will lower your debt to income ratio allowing you the ability to borrow more money or support an extra homeowner association payment or insurance payment.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.