Many people we talk to who had credit problems – have gone to an all “Cash” economy – meaning they don’t use credit at all any longer. We totally understand that theory, but we feel that the better program involves having SOME credit active. And today, that generally means that you need some revolving credit. Trying to figure out how much debt should you carry in order to have the BEST credit score is the real question most folks have. Debt To Income Ratios And Credit Scores are the two most important hurdles when you are applying for a mortgage.
Well, obviously, you don’t want to have more than you can pay, but seriously, there are other things you should look at too – like what KIND of debt do you have? Is it “Good Debt” or “Bad Debt?” Do you meet the minimum credit scores required to buy a home in 2017? With the changes by NCHFA this spring, most borrowers will need a 640 minimum credit score.
Good Debt is generally looked at as an Investment – a Car payment, a House Payment, that debt for items that should generally be considered an ASSET are in the Good Debt column.
BAD Debt traditionally has been seen as revolving credit card debt. The items we should probably be paying CASH for.
However, the way the Credit Models currently work – we all need some credit card debt in order to get the very best scores. If you can’t get a credit card right now, look into a Secured Credit Card. There’s generally a fee for the first year of having these cards, but it really is worth it.
Debt To Income Ratios And Credit
How do you know if you have too much Debt to buy a house? There’s a formula! To calculate your debt ratios (this is exactly what we do when we are looking at qualifying you for a mortgage) simply add up the amount you spend each month on debt and divide it by your total monthly income. Then, multiply that number by 100 – which will give you your Debt to Income Ratio. For example, let’s assume your gross income (before taxes) is $3,000 a month. Let’s also assume you spend $300 on credit card payments and $450 for your cars. Your ratio calculation would be $750 / $3,000 = 0.25. Multiply that by 100 for a debt-income-ratio of 25%.
If you are trying to buy a house, the maximum TOTAL debt ratio will not be allowed above 50%, unless you are putting way more than 20% down on the house. If you are getting a government loan (USDA Home Loan, VA Loan or FHA) we generally think the maximum the system will take is 42% – but if you have a really high credit score, we’ve seen USDA Home Loans accepted with a total debt ratio as high as 45% this year!
When it comes to debt, especially if you are trying to buy a house, the lower the debt you have, the better. Again, assuming your gross monthly income is $3000, than at 40% as a total debt ratio the most your TOTAL payments (including your house payment) can be is $1200. So, you deduct our $750 a month in debt from $1200… and you realize you would not be buying a very big house.
In the past several weeks the relationship between your Credit Score, your Income and the Debt you carry has made it “trickier” for us to pre-qualify someone. In July, we could qualify someone with confidence for a USDA Home Loan, knowing that if they had x for a front ratio, and a credit score of Y – we could easily make the loan work.
Then the USDA Home Loan Requirements changed for Automated Approvals this summer, and NOW it’s not so easy. Fortunately, our Bank allows the Loan Officer and Processor access to the Underwriting System. Some Banks make you wait to get the “findings” from the Automated System until the loan is UNDERWRITTEN (which could take 2 weeks or more after the contract is written). We don’t do that. We run EVERY loan through the Automated Engine as soon as we have a property address… just to be sure.
In GENERAL, we are finding that those who are OVER the Debt or Housing ratios will make it through the system if they have the following:
- A Credit Score of at least 660, and in some cases 680
- Very little Payment Shock – meaning what you are paying now for rent is going to be similar to what you are paying with your new house
- Cash Reserves left over after closing. IF YOUR RATIOS are tight – then you need to have at least one house payment left in the bank after closing.
If you are considering a mortgage loan, or if you have more questions about Debt To Income Ratios And Credit Scores – please let Steve and Eleanor Thorne in Cary, NC – We’ll help you with qualifying! 919-649-5058
I think you are right. But you should cover more on this topic.
I thought USDA had a debt ratio waiver…as long as your credit score was above 660. Is that still correct?
Yes – USDA has a debt ratio waiver… but the credit scores need to be over 660. We’ve also seen USDA loans approved with a College Degree copied and put in the file. There are several things we can do to help with various waivers. This was just a general overview of what Debt to Ratios look like 🙂
Hi Eleanor,
I moved to NC 3 years ago after retiring from my job as a social worker in NY. I haven’t worked for the last 3 years, but I recently became employed as a crisis manager at the local Christian Mission. I also have my LCSWA license and I would like to start my own practice in my home if I am able to buy a house. Can I use any of my new earned income to qualify for a mortgage, or am I limited to using only my retirement income? Also where would I get the USDA debt ratio waiver form?
Thanks for your help!
Are you being paid as a Crisis Manager? If so, that income would be considered income, that we can use. Any income you receive from having your own practice would not be considered unless you have two years of claiming it on your tax return – for debt to income purposes. If you are receiving that income for the first year, for instance, and apply, we would only be able to use the income from retirement. Here’s the catch… we WOULD be required to consider that income to see if you are over the income limits for the county, even if you are not able to use it to qualification purposes.
When you start a business, there are typically business expenses, licenses, continued education requirements – all of those things would be deducted from the income earned, to come up with your “taxable” income. As a self employed person, that is what USDA is looking at for qualification purposes.
Additionally, we would need a pretty strong letter concerning why you retired, and then decided to begin working again. For instance, “I came to NC and retired so that I could take care of an elderly parent. Once they passed away, I’ve now got more time on my hands, and want to re-enter the work force.”
So what if my student loan is in deferment and can i get my dti waived if I got a score of 680
Matt, unfortunately we will be counting some sort of student loan against you, unless you are a Veteran. Is there the opportunity to use a non-occupying co-borrower to make this work?
Elenor, my husband has a score in the mid 700’s and we recently were pre-approved to buy a condo that we really want. I make more money than my husband, however, my credit was not good enough to go on the application with him. He is self employed and we have 2 years of tax returns but we’re nervous that we won’t qualify because we took a loss last year with his business (our third year in business) what do you suggest I do??
Vikki! Did the LO make a suggestion as to what you can do to raise your scores? Even if you don’t go on the loan, that needs to be the priority for your family.