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Are Unsecured Debt Consolidation Loans Right For You?
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Turning Bad Debts into Good Debts through Investing Fundamentals
If you've ever earned enough money to put some aside, like most people you've probably invested it with an eye toward security – since, perhaps, you can't imagine yourself ever getting rich. "Most people dream of becoming rich, but it isn't their...
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Debt-to-Income Ratio - It's Just as Important as Your Credit Score When You're Shopping for a New Home
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 to qualify 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.
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.
About the author:
Charles J. Phelan has been helping consumers become debt-free
without bankruptcy since 1997. A former sr. executive with one
of the nation's largest debt settlement firms, he is the author
of the Debt Elimination Success Seminar™, a five-hour audio-CD
course that teaches consumers how to choose between debt program
options based on their financial situation. The course focuses
on instruction in do-it-yourself debt negotiation. Visit
www.zipdebt.com
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Advertisements Promising Debt Relief May Be Offering Bankruptcy |
Cautions consumers about ads in newspaper, magazine and telephone directories that offer quick fixes for debt problems. |
www.ftc.gov |
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Welcome to Debt Relief International |
Welcome to the web site of Debt Relief International. |
www.dri.org.uk |
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Debt relief steps, your free guide to debt help. |
Articles on debt relief, and credit management and repair. |
www.debtsteps.com |
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Factsheet - Debt Relief Under the Heavily Indebted Poor Countries ... |
The HIPC Initiative is a comprehensive approach to debt reduction for heavily indebted poor countries pursuing IMF- and World Bank-supported adjustment and ... |
www.imf.org |
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Special report: debt relief | Special reports | Guardian Unlimited |
February 6: A year ago the Guardian set out to track the west's promises of action for Africa on aid, trade, health and debt relief. As G8 finance ministers ... |
www.guardian.co.uk |
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Debt Relief Options - Findlaw for the Public - |
Welcome to Debt Relief Options. This section contains information about the ... To begin, select one of the Debt Relief Options topics from the list below ... |
bankruptcy.findlaw.com |
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William Brewer |
The Brewer Law Firm. William E. Brewer, Jr., Attorney at Law Board Certified Consumer Bankruptcy Specialist. 619 N. Person Street Raleigh, NC 27604 ... |
www.debtrelief.com |
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Debt Relief - InCharge Debt Solutions |
There are many ways to get out of debt, for good, and it may be easier than you think. The first step is knowing your options, the second step is taking ... |
www.incharge.org |
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Economic Policy and Debt |
May 2006, IMF And World Bank Support Cameroon’s Completion Point Under The Enhanced HIPC Initiative And The IMF Immediately Grants 100 Percent Debt Relief ... |
www.worldbank.org |
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Economic Policy and Debt - The Enhanced HIPC Initiative |
The Initiative’s debt-burden thresholds were adjusted downward, which enabled a broader group of countries to qualify for larger volumes of debt relief. ... |
www.worldbank.org |
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Debt relief - Wikipedia, the free encyclopedia |
Debt relief is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. ... |
en.wikipedia.org |
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Debt Analyzer, Debt Reduction Software, Home Page |
Debt Elimination at its best! Potential savings of hundreds or thousands of dollars! Build debt reduction, timed elimination or consolidation schedules. |
www.debtanalyzer.com |
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Superior Debt Relief |
We help you get rid of credit card debt much faster than you may believe possible with credit card debt settlement and negotiation tactics, providing debt ... |
www.superiordebtrelief.com |
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Debt Relief - Social and Economic Policy - Global Policy Forum |
Aid Inflows, Debt Relief Yet to Translate into Reduced Poverty (March 20, 2006) ... Fearing that the IMF could tie debt relief to economic benchmarks, ... |
www.globalpolicy.org |
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Debt Relief - Global Policy Forum - Social and Economic Policy |
Debt Relief - Global Policy Forum - Social and Economic Policy. The Debt Relief Page Has Been Moved to: ... |
www.globalpolicy.org |
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BBC NEWS | Business | Q&A: African debt relief |
BBC News looks at the progress of international debt reduction efforts, and the sticking points which continue to hamper the process. |
news.bbc.co.uk |
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Debt Relief Australia - Start Reducing Debt Today! |
Debt Relief offers Australians in debt assistance with finding the most appropriate debt relief solution. |
www.debtrelief.com.au |
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Debt Consolidation Australia, Debt Relief & Bankruptcy Information |
Specialising in debt agreements, mortgage refinancing and bankruptcy. Company profile, calculators, solutions, media releases, testimonials and existing ... |
www.foxsymes.com.au |
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Oxfam - Debt and Aid - Debt Relief for Nicaragua: breaking out of ... |
Oxfam policy paper on relationship between international debt servicing and poverty. Linked to table of contents and also zipped for download. |
www.oxfam.org.uk |
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What debt relief means for Africa | csmonitor.com |
This weekend's $40 billion debt cancellation deal could spark major improvements in the lives of the world's poorest people. |
www.csmonitor.com |
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