Today, to get approved for a mortgage and qualify for the best rates, good credit is more important than ever. When you apply for a mortgage to purchase or refinance a home, lenders need to determine your credit worthiness. They look at your credit score, most often the FICO Score, along with factors like your debt-to-income ratio, employment and credit history.
Your credit score helps us decide on the size and cost of a loan and predicts, based partly on your past behavior, how likely you are to repay the mortgage. Lenders use this score to help determine what type of mortgage you’re eligible for, whether to approve your loan and your interest rate.
Here are some ways to raise your credit score, but be patient – it may be two to three months before you see the increase…
- Don’t rack up your credit cards
- Maintain 2 lines of credit
- Pay your bills on time
- Get on payment plans for any outstanding collection accounts
A major factor in qualifying for a mortgage is the borrower’s debt to income ratio (DTI). When calculating your debt to income ratio, you first add up all of your monthly minimum debt payments and then divide that by your gross monthly income. Your potential future mortgage payment is put into that ratio.
For example if you have a $200 car payment, $100 dollars in credit card debts, and your future mortgage payment is going to be $1200, you add them up and they total $1500 in total monthly debt. ($200 + $100 + $1200 = $1500). You only want to include payments that would be on your credit report for this. Payments like an electric bill or car insurance do not get calculated in.
Then say your monthly gross income before taxes and deductions is $5000. To calculate your DTI, you would divide $1500 (your monthly debt) by $5000 (your monthly income). This equals 30%. So that means your DTI is 30%. ($1500/$5000 = .300 or 30%).
Times have changed in the mortgage industry. It is not just enough to have or come up with money for your purchase. It is now necessary to provide documentation on where the money comes from. If you can document the money from personal savings, income, or retirement it makes for a smooth loan process. When a large deposit or money transfer occurs it has to be sourced, every penny, every time. This can be a headache, especially for you. How do you avoid that headache?
- Do not transfer money between your accounts
- Do not open up any new accounts
- Keep in mind that any cash deposit will have to be sourced
- If you sell any personal items and deposit the cash, keep a receipt of the sale
- Do not transfer balances between accounts