We still don’t know how credit is exactly calculated by the 3 bureaus (TransUnion, Experian and Equifax), because they will not release their algorithms. But they have given a percentage of how things are broken down:
– 35% Payment History: This includes how many times you’ve been late on accounts, when the last late was and how severe you’ve allowed accounts to go delinquent.
– 30% Amounts Owed: Total amounts owed on all accounts as well as the difference between your balances and limits (utilization). People who max out their limits have a greater risk for default. If your accounts are over 50% of your limit, this will negatively affect your credit, and under 50% will start positively affecting your credit. Keep your balances as low as possible.
– 15% Length of Credit History: The bureaus want to see a long history of credit. If you have to close accounts, choose to keep the old ones open so you don’t lose all that history.
– 10% New Credit: New credit isn’t always a bad thing. Although it does affect your length of credit, it’s another account on your credit that can help improve your scores. Do not apply for a lot of new accounts at one time or your scores will be hit hard.
– 10% Types of Credit: The bureaus want to see a healthy mix of accounts. Have a balance of revolving credit like credit cards and installment loans like auto loans and mortgages.
Please do not hesitate to let me know if you have any questions, comments or referrals.
Your Lender for Life,
Qualifying for a Loan
When qualifying a buyer, a lender will take a look at credit, income, liabilities, and assets. It’s important to sit down with a loan originator to take a look at these items together and find out what you qualify for. Here are the following documents needed to start the pre-approval process:
– 2012 and 2013 Signed Federal Tax Returns
– 2011, 2012, and 2013 W2s and 1099s
– Last 30 days of paystubs
– Last bank statement
– Copy of Driver’s License
What lenders look for with these documents:
- Credit: Most lenders will require a minimum credit score of 640 with little to no derogatory trades like late payments, collections, judgments, bankruptcies or foreclosures listed on the credit report. If you have any of these derogatory trades, you can probably still qualify for a loan. Please reach out to us so we can take a look and see if there’s anything we can work with you on to get you in the right spot.
- Income and Liabilities: Lenders must make sure you’re able to pay back the mortgage and can usually only go up to a certain debt to income ratio. The lender will add up all your current monthly liabilities reported on your credit (credit cards, car loans, mortgages, student loans, etc.) plus the new monthly payment you will take on with the new mortgage and divide this total number by your monthly income. Recent guidelines have limited this debt to income ratio to 43%. But there are exceptions if you have a large amount of money saved up.
- Assets – lenders will also make sure you have enough assets to cover the down payment and closing costs. Refrain from depositing a bunch of money into an account or transferring money between accounts. This is because every lender must have you write a letter of explnation and source all deposits that are 25% of your monthly income or more. This rule is to abide by the Patriot Act to make sure you are not a terrorist or laundering money for terrorism.
Please let me know if you have any questions, comments, or referrals.
Your Lender for Life,
Great blog for first time homebuyers to better understand DTI qualifications.
So now you’re ready to charge ahead into the home buying process, right? Maybe not. If you’ve overlooked your debt-to-income ratios, you might not be as mortgage-ready as you thought.
What are they?
As the name suggests, debt-to-income ratios (DTIs), are ways of measuring a person’s monthly debt payments as they relate to incoming cash.
There are two main types of debt-to-income ratios used by mortgage lenders. These are known as the front-end ratio and the back-end ratio. The front-end ratio measures monthly payments for only housing-related expenses, like mortgage principal, interest, taxes, mortgage insurance, homeowner’s insurance and HOA fees (if applicable).
The back-end ratio encompasses all debts that are currently or will be paid on a monthly basis, like the housing-related expenses, home equity loans, credit card minimums, student…
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With house values increasing and historically low rates, some renters are still wondering why they should own their own home. Here are some reasons you should consider buying a home:
2. With each payment you’re making towards your mortgage, you’re investing in your home by increasing the equity. You could see this money down the road when you decide to sell your house or do cash out refinance. When you’re renting, you’re paying for someone else’s mortgage and investment.
3. You can change the look and layout of the house to fit your style. You can paint, remodel and change the house without worrying about asking for permission from the landlord.
4. Depending on your situation and what you qualify for, you could be saving money on a mortgage payment vs. a rent payment. Trulia just released that in 2013, buying a home in Denver was 45% cheaper than renting (http://trends.truliablog.com/vis/rentvsbuy-summer-2013/)
5. Low interest rates and affordable homes will not last forever. Although buying a home makes more sense financially now, that gap will start closing as rates and home values continue to increase.
6. Guidelines and regulations to buy a home have gotten stricter within the past few years and will only continue to make it harder to buy a home. Buy a home now while you can before income guidelines become stricter and make it impossible for you.
7. Tax Benefits – You’re able to write off a lot of expenses and costs of owning a home. I recommend consulting your accountant for specifics, but there’s many tax benefits of owning a home.
8. One thing to keep in mind is the upkeep of a house once you own it. There isn’t a landlord to call and take care of repairs and damages. You’re on the hook if anything happens to the property, so saving money is even more important than before.
Don’t hesitate to let me know if you have any comments, questions or referrals.
Your Lender for Life,