
No one likes to see medical bills piling up, and rising utility, cellphone and internet bills can wreak havoc on your monthly budget. Can these bills also prevent you from getting a mortgage or other kind of loan?
The importance of your debt-to-income ratio
When you apply for a mortgage, your lender will study your debt-to-income ratio to determine how much they are willing to loan you.
Your DTI ratio measures how much of your gross monthly income — your income before taxes are taken out — your monthly recurring bills consume. The higher this ratio is, the less likely it is that lenders will approve you for a mortgage.
Although the target ratio varies from lender to lender, most lenders prefer that your DTI ratio be no higher than 43% — meaning that your monthly recurring payments, including your new mortgage payment, should equal no more than 43% of your gross monthly income.
But what do lenders consider recurring monthly bills?
Not all monthly payments count
When calculating your DTI ratio, lenders consider the following to be monthly payments: your mortgage payment, student loan payment, auto loan payment, personal loan payment and the minimums you must pay each month on your credit card accounts.
Wells Fargo says that any child support or alimony payments that you are required to make are also included in your DTI ratio, as are any monthly payments you must make for property taxes and homeowners' insurance. If you have cosigned any loans, those loan payments are also included in your DTI ratio.
Other monthly payments are not included in your DTI ratio. These include medical debt, utility bills, cable bills, monthly cellphone payments and monthly internet bills. You won't have to worry about these debts, then, when aiming for a lower DTI ratio.
But there still may be problems
Even though certain debts aren't included in your DTI ratio, they can still hurt your chances of qualifying for a loan (or credit card). If you fail to pay these bills and your providers eventually send the debts to collections, that is reported to the three national credit bureaus — Equifax, Experian and TransUnion — and reflected on your credit reports.
Collection notices on your credit reports can cause your three-digit FICO credit score to tumble by 100 or more points. A lower credit score makes it far more difficult to qualify for mortgage, personal and auto loans. It also makes it more difficult to qualify for new credit cards or student loans.
The message? Pay all your monthly bills on time, even those that don't directly impact your DTI ratio. You might consider working with a financial professional to help manage your debt.
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