While a great credit score can do nothing but help your cause when applying for a home loan, it’s certainly not the only factor and, surprisingly, not even the most important factor. According to Informa Research Services on behalf of FICO, on a $400,000 mortgage (based on this model) you could expect the following monthly payments based on your credit score:
While the $380 monthly difference between the top and bottom tiers is nothing to sneeze at, what lenders are really looking at is your debt-to-income ratio (DTI).
Your debt-to-income ratio is the amount that you pay out in bills every month divided by how much you earn every month. This seems pretty straightforward, but there are a few things that are helpful to know here. Even if you pay off your credit cards every month, only your minimum payment counts towards your DTI. Also, this calculation is made based on your income before taxes. For example, if you earn $5,000 a month and your monthly expenses including housing total $1900, your DTI is 38%.
Why is all of this important? Well, the maximum ratio that a lender can accept on a Qualified Mortgage is 43% for Conventional and FHA loans and 41% for VA loans. When crunching the numbers, take into consideration that while you may qualify for a mortgage, your monthly expenses may be higher than the debt that’s considered in your DTI.
Contact me to help you find a qualified lender that can help put you in a great home, start building equity, and still maintain the lifestyle to which you’ve become accustomed.