How did I discover The Formula?
I’m going to tell you exactly what The Formula is, but first I want to share with you how I came up with it.
My background is in the financial analysis of renting, owning homes, mortgages and refinancing. I’ve started two companies centered around the financing of real estate and have been in the business of analyzing homeownership scenarios for about 12 years.
But two things happened to me in the last year that gave me an “a-ha moment” about how aspiring homeowners can discover a clear path to homeownership:
- First, I refinanced my house this year and during it, my loan officer had me look at “debt-to-income ratios” so that I could duck under the requirements for a particular refinancing option.
- Second, because of my background in housing finance, people always ask me for mortgage advice and I thought it was time that I got licensed so I could actually get loans for others. During the hours I spent studying for the mortgage licensing exam, I learned the 6 most common debt-to-income ratios in the housing industry.
What is a debt-to-income ratio?
For any type of lending, personal loans, auto loans, and home loans, banks have a way to determine if you can pay them back. It’s expressed as your debt and payments divided by the income you make. For a house, the ratio is housing expenses divided by income, and also frequently housing expenses plus debt divided by income.
Here’s what I discovered: for 62% of all home loans, the debt to income ratios are known. That’s because these loans are backed by the government and the government determines the qualifications. As a prospective home buyer, learning these rules lets you see how close or far you are from homeownership and create a clear path. And, there are six types of loans that you can qualify for, making a variety of options for you to shoot for.
Why should you care about these ratios?
Once you know how your current financial situation compares to the debt-to-income ratio requirements for buying a house, you can make a winning strategy for how to get from where you are to where you need to be.
You can adjust the various factors in your “ratio” to meet the requirements.
For example, when I was refinancing, I had to adjust the monthly payment in accordance with my debt so that when it was added together and divided by my income, I would be under the threshold needed for my loan officer to approve my loan.
So you can think of each piece as a moving part – housing costs, debt, and income as a lever that can each be moved up and down.
- To qualify, you can lower your expected housing costs, through a less expensive property or a larger down payment, or a property with less property tax.
- You can reduce your debt.
- You can increase your income.
- Or you can do all three.
Knowing where you are today in relation to these requirements and what the requirements are lets you plot fastest path to homeownership.
I clarified this concept into an easy-to-follow process called The Formula
What is The Formula? It’s a system for identifying where you are now in terms of the requirements to own a home and a seeing the bridge that will get you there.
- First, you see the 6 loan types and the thresholds or debt to income ratios required for each
- Then, you use a Smart Goal sheet I made that makes it easy to see where you fall today
- Next, you can plot out unlimited future scenarios in terms of housing costs, debt and income levels to see the most likely goals that will allow you to fit under the ratios needed for homeownership
- Finally, you have an achievable, step-by-step path that shows you the smartest path to homeownership for you
How does it work?
For example, when you see a home you might want to buy, you can plug the details into the Smart Goals sheet and see what debt and income you’d need.
You can then set goals for debt reduction or boosting your income to get your dream house.
Or, if debt or income are fixed for the foreseeable future, see what mix of housing costs can allow you to qualify for a home in the timeframe that you want.
Following the steps in The Formula, you can create any number of strategies to satisfy the known ratios for qualification.
Configure attainable goals around credit, debt, income and housing costs to find the fastest path to homeownership!
No more guessing, no more feeling resigned to renting forever. With a roadmap of how to achieve the dream of homeownership, you can chart a clear path, and not let homeownership pass you by year after year.
You can have hope and certainty of homeownership because you have The Formula to get you there.