Understanding Debt-To-Income Ratio

When you apply for a mortgage, your lender will analyze your debt ratios, which are also known as your debt-to-income ratios, or DTI. Lenders calculate DTI’s to ensure you have enough income to comfortably pay for a new mortgage while still being able to pay your other monthly debts.

There are two debt-to-income ratios that your lender will analyze:
Housing Ratio or “Front-End Ratio”
Your lender will add up your anticipated monthly mortgage payment plus other monthly costs of home ownership. Other costs of home ownership could include homeowner association (HOA) fees, property taxes, mortgage insurance and homeowner’s insurance. Normally, some of these expenses are included in your monthly mortgage payment. To calculate your housing ratio or front-end ratio, your lender will divide your anticipated mortgage payment and home ownership expenses by the amount of gross monthly income.
Total Debt Ratio or “Back-End Ratio”
In addition to calculating your housing ratio, a lender will also analyze your total debt ratio. At this time your other installment and revolving debts will be analyzed and added together. Installment and revolving debts will appear on your credit report. These payments are expenses like minimum monthly credit card payments, student loan payments, alimony, child support, car payments, etc. Your lender will add up all your monthly installment and revolving debts in addition to your estimated monthly mortgage payment and housing expenses and divide that number by your monthly gross income.
Debt-to-Income Limits
Generally, your front-end and back-end debt ratios should be 28 percent and 36 percent or lower.

FHA limits are currently 31/43, though these can be higher with justification from the lender.
VA limits are only calculated with one DTI of 41.
USDA limits are 29/41.
Some lenders may be able to qualify you with a much higher back-end ratio by getting you approved for a non-conforming loan. A non-conforming loan does not conform to purchasing guidelines set by Fannie Mae and Freddie Mac. These purchasing guidelines usually have to do with standards or limitations on credit scores, loan-to-value (LTV) and debt-to-income (DTI) ratios. Generally non-conforming loans are considered riskier, and a borrower typically has to pay more than they would for a conforming loan.

It’s important to remember that purchasing a brand new home in the Dayton area can be much simpler with the guidance of a qualified mortgage loan professional.  For recommendations on finding a mortgage loan professional for your Dayton area new home, contact us at Peebles Homes. 

Article courtesy of the home experts at Zillow.

Understanding Credit Scores

Your credit report is separate from your credit score, though the score is developed from the report. In addition to viewing credit reports from the three major reporting bureaus, you also should obtain your FICO score. Your score is like a report card. Fair Isaac & Co. (the FICO score keeper) assigns you a number based on the information in your credit report. Since there are three credit-reporting bureaus, you have three FICO scores. Here are the scoring factors:

Credit Checklist
• Payment history — Have you paid your bills on time?
• Amounts owed — What is your overall debt?
• Length of credit history — How long have you been borrowing money? Mortgage lenders like to see a long credit history.
• New credit — Have you applied for new credit?
• Types of credit used — Lenders like to see all kinds of credit types: bank cards, car loans, student loans, and more.

What’s an A+?
The FICO scores range from 350 to 850; an 850 is the Holy Grail of credit scores and 723 is the median score in the U.S., but you can expect good mortgage interest rates at the 720 to 760 level and up.

For anecdotal evidence of your good credit standing, if you notice you are receiving a lot of zero percent credit card or lines of credit offers, you are probably in pretty good shape.

Home buyers who pursue an FHA loan, one of the most common loan types for first-time purchasers, can usually secure a loan if their credit is 620 or over.

Seventy to 80 percent of mortgage lenders use FICO as their means of determining your interest rate and the types of loan you qualify for; as interest rates creep up, this difference can be significant.

Free Reports
The good news is that your credit report is easy to get. A federal regulation that went into effect in December 2003 gives consumers access to one free credit report per year from each of the three reporting bureaus: Equifax, Experian, and TransUnion. The online report is generated after you answer a series of security questions and only takes about 10 minutes to complete.
Your FICO score is in easy reach as well at www.myfico.com. Each FICO score costs approximately $15, but this expense may save you thousands over the life of your mortgage if you end up with a lower interest rate.

Credit Score Ranges
How do you know what a good score is and what a bad score is? Well, that’s sort of a gray area since different scores are calculated in different ways; different creditors use different scores, and no one knows exactly how they are calculated since those formulas are proprietary to the companies using them. Scores may range from around 300 to 900 with the average credit score in America being at about 740. Here is an approximate range of how credit scores are judged:

Excellent credit = 720 and above
Good credit = 660 to 719
Fair credit = 620 to 659
Poor/bad credit = 619 and below

How Credit Reports Affect Your Mortgage
Before you start house hunting and getting pre-approved for a home loan, check your credit report and get your FICO scores. Why? Your credit rating may be the single most important piece of financial information you have to obtain a mortgage at the best interest rate.

Checking your credit rating before you purchase will give you time to correct reporting errors and to clean up your ratings if they are in the dumps. One lender tells us that it can take up to 90 days to get erroneous — and costly — information off your report, although some prospective borrowers say they have a much quicker outcome.

What’s in a Credit Report?
Credit reports are a history of your track record of borrowing and repaying banks, credit card companies, and any other lenders. When you apply to borrow money, the lender uses the credit report to decide if you are a safe bet, or a risk. They also base whatever interest rate they offer on that report and the resulting credit score.

A credit report includes:
• Credit history. This includes account information detail, such as your payment history, and specifically information about accounts that may have been sent to debt collection agencies. It also includes the number of accounts you have and the type of each, and if you are in good standing with each.
• Who is examining your credit. Any inquiries by lenders or others about your credit is recorded as well.
• Any judgments against you, such as bankruptcy.
• Personal information about you, such as your addresses (current and past), Social Security number and your previous employers.
• A section for comments by you, in the event you have disputed the report specifics in the past.

How to Request a Report
There are three major credit-reporting agencies: Equifax, TransUnion, and Experian. You can receive a free copy of your credit report once a year from AnnualCreditReport.com, which gets the reports from each of the three companies.

It is a good idea to get a copy annually so that you can check it for errors. Errors range anywhere from name misspellings and incorrect Social Security numbers to accounts being listed as still open when in fact they have been closed — an error that can hurt you when you need to get a mortgage.

Your credit report also will show whether you have been the victim of identity theft. If your personal information, such as your Social Security number, has been changed, the report will reveal it.

It’s important to remember that purchasing a brand new home in the Dayton area can be much simpler with the guidance of a qualified mortgage loan professional. For recommendations on finding a mortgage loan professional for your Dayton area new home, contact us at Peebles Homes. 

Information courtesy of the home experts at Zillow.