Buying and moving into a new home is one of life’s great experiences, especially if you’re buying your first home. From getting that pre-approval to the “yes!” response on an offer to closing and moving in, every step is exciting. And while the process is engaging and fun, it’s important to prepare for moving day […]
What is disposable income?
When making an important financial decision like buying a home, discussion of your income, expenses and how you manage your money all come into play. Disposable income is money you have for spending and saving after taxes and other expenses have been paid. Many statistical measures and economic factors are derived from disposable income, such as discretionary income and personal savings rates. These figures are part of determining whether you will be approved for a mortgage loan.
Here’s what you should know about disposable income and how it may affect the homeownership process:
Disposable income is important for applying for a mortgage
Your debt-to-income ratio is one of the most critical factors regarding disposable income when applying for a mortgage. The lower your ratio, the more likely you will get approved for a loan. A low ratio shows lenders that you have manageable monthly debt payments and taking on more debt wouldn’t be a hardship.
It indicates you would be a reliable borrower based on your finances. On the other hand, a high debt-to-income ratio means that you may not have enough disposable income left to take on additional debt, such as a mortgage. If your debt-to-income ratio is too high, it can make you ineligible for a loan.
Disposable income helps you responsibly budget the costs of homeownership
Even though you may qualify for a mortgage, it’s important to remember there are costs beyond the mortgage payments. Home upkeep and repairs need to be considered when budgeting for a home. Budgeting responsibly and not purchasing more than you can afford can leave you with disposable income to use however you want.
Maintaining financial stability before you purchase a home is key. Without enough disposable income, you may not be able to afford a mortgage loan or the lifestyle you want after you purchase your home. Remember to consider all the other costs before you become a homeowner and how crucial disposable income is to your future.