A good credit score is not enough to be mortgage-ready
Yes, you need a good credit score. Just as important is your debt-to -income ratio. Your debt to income ratio tells a lender how close you are living to the edge. It is known as DTI.
DTI measures the percentage of your gross monthly income is used to service certain debt types.
There are 2 types of DTI
The front-end ratio, also called the housing ratio shows what percentage of your income would go toward your housing expenses. housing ratio front-end ratio includes
Back End Ratio
The back-end ratio shows what percentage of your income would go toward debt service. It includes
Lenders typically say the ideal front-end ratio should be no more than 28%, and the back ratio, including all expenses, should be 36% or lower. In reality, depending on credit score, savings and down payment, lenders accept higher ratios. Limits vary depending on the type of loan. For conventional loans, most lenders focus on your back-end ratio
Recommended debt-to-income limit is 31% on the front ratio and 43% for the back ratio. But with certain compensating factors, the FHA automated approval system accepts ratios as high as 46.99% for housing expenses and 56.99% for the total back ratio
Downpayment assistance grants and other first time home buyer programs usually overlay additional DTI underwriting guidelines on a mortgage application. The overlays are not necessarily more restrictive. Some may loosen DTI limits.
You should consult with a knowledgeable experienced loan officer (LO) in first time homebuyer programs for specific options available to you. This person and your research will be your best resources in finding programs. Be woke to the fact that many of the grants and other programs can be geo-specific even down to the zip code.
Other DTI Ratio Need to Know
DTI is calculated on GROSS Monthly Income. You live out of NET Monthly Income. This is mainly an consideration when the LO tells you how much home you qualify based on your DTI. You should decide how much of a monthly payment you can afford before you begin the mortgage application process.
If you are paying credit card interest on consumables like gas, food, entertainment or travel, then you are hustling out of the world backwards.
The good memories that linger are often corrupted by payment stress. It is so much better to come back with just the memories and not the bills. Stop paying double digit interest on your contributions to the sewage treatment plant and carbon emissions.
Credit card interest rates are usurious compared to other forms of borrowing. Current rates range between 13.12% and 22.99%. Carrying a balance on a credit card is not is good for your money. You can end credit card debt, if you do the right things based on your circumstances.
You can start by resolving to use ONLY cash for consumables from now on.
Cash limits your spending. It makes your spending more intentional and purpose driven. The key is to not take more cash than you need. Overspending will create budget shortfalls elsewhere.
Cash is any of the cash instruments. That would be debit and gift cards (no overdrafts allowed.) A well managed credit card. That is a credit card that has the statement balance paid in full every month by the due date. And of course, actual dollars and coins.
Going to cash for consumables may require a behavior change. Behavior change can be hard if you don’t frame it in your mind right. Think of it as a benefit and not a sacrifice. It is you not setting yourself up for failure. It also eliminates committing future earnings to service debt for transient purchases.
So go to cash for all consumables going forward. It may be tight for a while. You will use cash to take care of your current fuel, entertainment, and food needs. You will have to service and payoff the current debt, also.
Until then you are going to have to find creative ways for your family to conserve, entertain and eat. Some options include short term use of a food bank. Leaving your vehicle parked. Selling some of your stuff. Finding a paying side hustle. Netflix and chill. What are your strategies?
Home ownership is arguably the American dream. Its nightmarish however qualities are often obscured when the "dream" is promoted to novice home buyers. The real estate-financial services complex generates profits from first time home buyers. It is in its interest to keep that outlook as rosy as possible.
When it comes to buying your home you need to be laser-focused on what your interests are in the transaction. Understanding this will give you confidence and negotiating leverage.
Owning a home is more than a notion. Buying a home has a certain degree of difficulty. Keeping a home may be more difficult yet depending on your buying choices.
Did you make informed choices based on information provided by non-interested parties? Was the information objective? Were all your options vetted?
The assumptions that often go with the homeownership dream are often countered by geo-vulnerability. Not all the traditional assumptions are valid for all neighborhoods. If nothing else your homes real estate is hyper-local, zip code level local.