What is Indebtedness & How to Reduce It
Before you go filling out the application for a mortgage, you might want to consider your indebtedness. Death is nature’s Draconian way of telling us to slow down. Having your mortgage application rejected because you’re in hock up to your hip-huggers is the lender’s gentle suggestion that you’d be wise to put your financial house in order.
What is indebtedness? Indebtedness is a fancy term for being overextended. This means you have exceeded a safe level of debt in relation to your income. Even if you’re only moderately overextended, the lender has done you a tremendous favor by turning you down. If your debt-to-income ratio is too high before buying a house, piling on additional debt in the form of mortgage payments and homeownership expenses will probably turn your dream home into a fiscal nightmare.
Face it. Even though you’re perfectly willing to shoulder the additional financial burden of homeownership, the lender is telling you that too much debt will ravage your ability to live within your means. You won’t own the house; the house will own you.
Here are four ways to handle the problem of indebtedness:
- Reduce long-term indebtedness. If you’re close to being able to qualify for a mortgage, paying off a chunk of installment-type debt such as a student loan or car loan will most likely bring your debt-to-income ratio within acceptable limits. Discuss this game plan with your lender. (Car loans and other long-term installment debt with ten or fewer payments remaining are typically not considered long-term debt.)
Fannie Mae and Freddie Mac don’t like total monthly payments on long-term indebtedness (including your mortgage) to exceed about 40 to 45 percent or so of your gross monthly income.
- Expand income or restrict living expenses. If you’re living way beyond your means, you have two choices: Increase your income or, more realistically, put yourself on a stringent financial diet to reduce your blimpish budget.
- Get real. If you have champagne tastes and an unalterable beer budget, something’s gotta give. Ask your lender to define the outer limits of your realistic purchasing power. The easiest way to cut your payments for a mortgage, property taxes, homeowners insurance, and other ownership expenses is to buy a less expensive home.
- Reach out and touch someone. If you’re lucky enough to have fiscally powerful parents or relatives to whom you can turn for financial assistance, you have a huge advantage. Consider using it. Don’t let false pride about asking them for a loan or having them cosign a mortgage prevent you from owning a home. After all, in many areas of the country, property is much more expensive today than it was back in the Stone Age when your mom and dad bought their first home.
Cosigning a mortgage is inherently risky for the co-borrowers. If you make payments late or, worse, default on your loan, you sully your cosigners’ credit record every bit as much as your own. Even if you mail in your monthly loan payments long before they’re due, however, the cosigners’ borrowing power is reduced, because they have a contingent liability to repay your loan if you default. In fairness, you should discuss these financial ramifications with your co-borrowers before they cosign your loan papers.