The Home Buying Numbers: Credit Score and Debt-to-Income
A very normal question that comes up in the pre-homeowner stage is often “What does my credit score need to be?” and “What should my Debt-to-income ratio be?” In fact every homeowner has faced these questions in the home-buying process. Your credit score is indeed an important factor in securing a home loan, but it’s not the only factor.
An individuals income and current debt payments are often the most heavily weighted qualifiers. Debt payments, meaning bills you pay monthly, coupled with your monthly income, build a debt-to-income picture that shows lenders how much of a mortgage payment you can afford.
If you have a perfect credit score, but more debt than income, the odds of a lender being able to offer you a loan are slim. Don’t be discouraged though, there are always different options available.
What credit score should I have?
Various lenders has different credit score requirements but generally for a conventional loan not backed by the government (like an FHA or VA government backed loans) the necessary credit score to by a house is around 660. Most lenders can secure you a loan with a decent interest rate with a score of 660 or above. The other number that is very equally important is your debt to income ratio.
What is debt-to-income? What should my DTI be?
Debt to income ratio is another very important factor in getting approved for a home loan. Lenders look at this number to determine whether or not they can provide you with a loan based on how much money you have compared to the amount of debt you have.
Some lenders look at this number with even higher regard than your actual credit score. This is mainly because the mortgage lender has to be able to show that you will be able to pay your bills and your new home loan without any issue.
The debt-to-income ratio is how much of your gross income goes to pay all your debt obligations. For this equation, debt obligations refer to things like your mortgage loan including principal, interest, taxes and homeowners insurance, your car loans, student loans, alimony or child support, and if applicable, any condo fees. Basically any bills that you pay that are recurring and not a short-term debt (debt that you pay off in less than a year) are used here as your “debt”.
How to figure your debt-to-income ratio?
Once you have your debt amount figured, divide your debt by your income amount. This will give you the debt-to-income percentage. The recommended number for this is 36 and under. This isn’t to say that lenders won’t lend to you if you are over the recommended amount, but generally the lower the number, the better.
What if my credit score is not high enough? What if my DTI is too high?
Many different options are available for Arkansas home buyers to obtain financing. Just because you numbers aren’t “ideal”, does not mean that you cannot buy a home. Call me about the latest Arkansas home loan programs.
If you are preparing to buy a home in Northwest Arkansas but are unsure of your options, please Contact Me and we can go over some of the various loan options that are available for you. There are a ton of different ways to get your into a new home, even with less than perfect numbers. Don’t let uncertainty stop you from becoming a homeowner! Give me a call anytime.
Have a Great Weekend Arkansas!
Steve Atwell, Buyer’s Agent for Northwest Arkansas
Email: Steve Atwell