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A good debt-to-income ratio

It’s the amount of debt you have compared to your income. Lenders use your debt-to-income ratio to decide whether you’ll be likely to repay your debts to them.

To figure out what your debt-to-income ratio is, add up your ongoing monthly bills. Minimum credit card payments, rent, auto loans, and student loans. Only consider your minimum payments, not the total amount you owe. Add them all up and divide it by your gross monthly income (before taxes and other deductions). This is your debt-to-income ratio and it’s written as a percentage.

As example, if you had a $1,100 monthly car payment, $300 minimum card payment, and $300 minimum student debt payment, your total monthly bills would be $1,700. If your monthly income is $5,000, your DTI ratio would be 1,700/5,000 = 0.34. 0.34 x 100 = 34. Your DTI would be a very healthy 34%.

DTI scores
Your lender’s biggest concern is whether you can pay back the loan. Your DTI score is just one of the calculations they use to help decide. They’ll also look at your FICO score, employment history, income, assets, and more.

At a minimum, they want to see your ratio under 50%. It’s ideal to have yours closer to 35%, but ranges between the two are acceptable.

Average debt per American
It’s difficult to tell what an average DTI ratio is, but we can say what the average amount of debt is. A 2021 CNBC report calculated the average American has $90,460 in debt. That includes their credit cards, personal loans, mortgages, and student debt. The higher an individual’s income, the higher their debt (and the easier it is for them to pay off).

Age 18 to 23: $9,593
Age 24 to 39: $78,396
Age 40 to 55: $135,841
Age 56 to 74: $96,984
Age 75+: $40,925

>> What do home lenders do when you have student loan debt?

Reducing your DTI
There are just two ways to do it. Reduce your monthly expenditures or increase your monthly income. Both options will take time and effort but pay off in the long run.

Rather than deciding on your own if your DTI is too high, consider talking to your home lender to go over it together. Local home lenders, like Mann Mortgage, will review your DTI and work with you and your unique financial decision to find the right loan.

6 things you shouldn’t do when you’re pre-approved for a mortgage

Just because you’re pre-approved for a loan doesn’t mean you’re guaranteed to get final approval on your loan. When your offer has been accepted and it’s time to begin closing on your loan, your mortgage lender is going to take another detailed look at your credit history, assets, income, and FICO score. You want to make sure you look just as good as you did the day you got pre-approved. How can you do that? 

Don’t miss payments
They’re going to see whether you’ve been late or missed any payments on your credit cards or loans since you were pre-approved. Just one 30-day late payment can negatively impact your credit report by many points. Make sure you have all your medical bills, parking tickets, and utility bills up-to-date and paid too! 

Don’t apply for new credit
Applying for new credit will lower your credit score and, if you’re approved, increase your debt-to-income ratio – a key factor lenders consider when you apply for a mortgage. These changes could affect the terms of your loan or get it denied altogether.

Don’t change jobs
This might be out of your control, but it’s best to stay with the job you had when you had your loan pre-approval. Switching jobs could signal a change in income, which may impact the amount you’re approved to borrow.

Don’t make any large purchases
You might be tempted to start shopping for furniture or appliances for your new home, but you shouldn’t do it. If you put the charges on your credit card, your debt-to-income ratio will change. And if you pay cash, you’ll have less money for a down payment or as an asset. Hold off on any large purchases until you’ve closed on your new home!

Don’t make big deposits
Any big cash deposits into one of your accounts prior to your mortgage closing looks fishy to an underwriter. They’re trained to spot evidence of borrowers needing to be gifted money for their mortgage – a clear sign the borrower may default. If it’s inevitable that you’ll have a deposit over $1,000, expect to be able to show the origin of the funds to your mortgage company. Transferring money between your accounts is generally fine.

Don’t refinance your loans
Don’t refinance your loans for a lower rate until after your home loan has closed. Refinancing is considered taking out a new line of credit, which isn’t good for someone looking for a mortgage. An established loan you’ve been making regular payments on looks better to mortgage underwriters than a new lower-interest loan you haven’t made many payments on yet.

What SHOULD you do?
Talk to your mortgage expert if you have any question on your current credit score or how your actions will affect your pre-approval. Your local Mann Mortgage branch is dedicated to making your experience both personalized and hassle-free.

6 things you shouldn’t do when you’re pre-approved for a mortgage

Just because you’re pre-approved for a loan doesn’t mean you’re guaranteed to get final approval on your loan. When your offer has been accepted and it’s time to begin closing on your loan, your mortgage lender is going to take another detailed look at your credit history, assets, income, and FICO score. You want to make sure you look just as good as you did the day you got pre-approved. How can you do that?  

  1. Don’t miss payments

They’re going to see whether you’ve been late or missed any payments on your credit cards or loans since you were pre-approved. Just one 30-day late payment can negatively impact your credit report by many points. Make sure you have all your medical bills, parking tickets, and utility bills up-to-date and paid too! 

2. Don’t apply for new credit

Applying for new credit will lower your credit score and, if you’re approved, increase your debt-to-income ratio – a key factor lenders consider when you apply for a mortgage. These changes could affect the terms of your loan or get it denied altogether.

3. Don’t change jobs

This might be out of your control, but it’s best to stay with the job you had when you had your loan pre-approval. Switching jobs could signal a change in income, which may impact the amount you’re approved to borrow.

4. Don’t make any large purchases

You might be tempted to start shopping for furniture or appliances for your new home, but you shouldn’t do it. If you put the charges on your credit card, your debt-to-income ratio will change. And if you pay cash, you’ll have less money for a down payment or as an asset. Hold off on any large purchases until you’ve closed on your new home!

5. Don’t make big deposits

Any big cash deposits into one of your accounts prior to your mortgage closing looks fishy to an underwriter. They’re trained to spot evidence of borrowers needing to be gifted money for their mortgage – a clear sign the borrower may default. If it’s inevitable that you’ll have a deposit over $1,000, expect to be able to show the origin of the funds to your mortgage company. Transferring money between your accounts is generally fine.

6. Don’t refinance your loans

Don’t refinance your loans for a lower rate until after your home loan has closed. Refinancing is considered taking out a new line of credit, which isn’t good for someone looking for a mortgage. An established loan you’ve been making regular payments on looks better to mortgage underwriters than a new lower-interest loan you haven’t made many payments on yet.

What SHOULD you do?

Talk to your mortgage expert if you have any question on your current credit score or how your actions will affect your pre-approval. Your local Mann Mortgage branch is dedicated to making your experience both personalized and hassle-free.

Buying a home with challenged credit

Buying a home with bad credit can be a challenge, but it’s not impossible. Your credit score – whether it’s good or bad – is just one of the factors your home lender will use to decide whether you’re eligible for a loan.

What is a bad credit?
Bad or “low credit” typically means your FICO score is under 600. FICO credit scores range from 300 to 850 and represent how likely you are to pay back a loan. Your score is calculated based on your payment history, amount owed, length of your credit history, new credit, and the mix of credit you have. Your score is used by lending agencies to determine whether you’ll be eligible for a loan and at what interest rate. The closer your score is to 800, the more loan options and lower interest rates you’ll have access to. Lenders tend to define the scores as:

Exceptional: 800+
Very good: 740 – 799
Good: 670 -739
Fair: 580 – 669
Very poor: 300 – 579

To check your credit report annually, you can visit annualcreditreport.com to see what your current FICO score is. It’s free to use once a year and it won’t impact your credit rating.

What’s the minimum credit score needed for a home loan?
There isn’t a universal minimum credit score needed to get a home loan. Instead, each mortgage lender decides the minimum credit score they’ll accept. But when a score is under 600 it’s classified as “subprime” and your loan options drop significantly. A score under 550 is going to have very limited loan options with very high interest rates.

Other factors mortgage companies use
Besides your FICO score, a lender will evaluate how much money you have for a down-payment, how much debt you already have, your credit history, and your income. To increases your chances at getting a loan with bad credit, the best option is to have as large a down payment as you can afford to minimize your risk to the lender.

A potential borrower with a low credit score but a sizeable down payment and a decent credit history is more likely to be approved for a loan than someone with low credit, a small down payment, and no credit history.

How much more will bad credit scores cost in the long run?
Since early 2020, interest rate on mortgages have dropped. Lower mortgage rates mean smaller monthly payments for principal and interest – and a lower cost for the loan over its life. That said, there’s still a big difference between how much someone with good credit will pay compared to someone with a bad credit score.

From the chart below, you can see a borrower with a credit score of 639 will end up paying $95,091 more in interest over the lifetime of the loan than a borrower with a credit score of 760.

Source: MyFICO.com

What home loans are available to someone with bad credit?
FHA loans are insured by the Federal Housing Administration and are designed specifically for borrowers with low credit and lower-to-middle income. You’ll need a down payment to qualify for FHA loans, but your mortgage lender may be able to secure a loan through them even if you have a FICO score as low as 500.

The best way to evaluate your loan options is to speak with a local mortgage expert. Based on your financial goals, loan eligibility, and local real estate conditions, they’ll be able to help you find the right loan for your needs.

What happens when a home lender checks your credit?

One of the first steps in applying for a loan is having a home loan lender check your credit to see what you’d qualify for. What does that mean and what impact will it have on your credit score?

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Your lender will see your credit report
You begin building your credit history with your first credit card or loan. The history of how you handle your credit builds your credit report. Your home lender will request a copy of your credit report from one of the three major credit reporting bureaus – Equifax, Experian, or TransUnion. Their report includes the following about your credit:

Personal identifiable information – As example, your social security number, date of birth, name, and employment information. This is used to verify your identity.

Credit accounts – A list of any credit accounts you have. This includes credit cards, auto loans, mortgages, student loans, etc. Your report shows the date you took out credit, the credit limit or loan amount, your payment history, the account balance, and whether you’ve made payments on time.

If any of your accounts went into collection (even if they weren’t credit accounts), there will be a record of it on your report for seven years. Paying off the debt will not remove the record from your report faster.

Credit inquiries – A list of times when companies have pulled your credit history. Only those made in the past two years remain on your report and only those done within the last year impact your credit score.

Public records – A list of instances of bankruptcy. Chapter 7 bankruptcy remains on your report for ten years and Chapter 13 will remain for seven.

Your credit will take a small hit
When your home lender requests a copy of your credit report from a credit bureau, it indicates to the credit bureau you’re looking to take on additional debt. It results in a small negative impact on your score – usually five points or less. It’s an unavoidable part of getting a home loan and your score will bounce back again in a few months.

Don’t let this small hit on your credit keep you from contacting other lenders to find a better rate or home loan term. Within a 30-day window, you can have other home lenders pull your credit report without it impacting your score again. Credit bureaus know it’s a good idea for consumers to shop around to find the best rate, so they won’t penalize you for it.

You’ll get unsolicited credit offers
It’s common to start receiving phone calls or letters from other lenders after your credit report is pulled. How did these other lenders know you were looking for a loan and why are they contacting you?

When your home lender requests a copy of your credit report, it alerts the credit bureau that you’re looking for a loan and they turn this knowledge into a commodity. Within 24 hours, the credit bureau will sell information about you and the loan you’re applying for to lending agencies. They can provide your name, address, credit score, and type of loan you applied for.

Some lenders will buy your information (called a trigger lead) from the credit bureau if, based on your data, they would like to do business with you. They will call, email, or mail you their own mortgage offer which may be better than the one your lender is giving you. In theory, the more offers you get, the more likely it is that you’ll get a good deal. That’s why selling and buying trigger leads is legal in all 50 states.

Mann Mortgage has made the decision not to purchase trigger leads for our competitors’ customers. We feel it’s an invasion of privacy that can expose people to identify theft. If you are currently working with Mann Mortgage and have any questions about the offers you receive or who an offer came from, please contact your Mann Mortgage lender right away. They will be able to help you.

Remember – your credit score is only part of your loan application
Your credit score and history are important components of your home lender’s decision on whether to extend credit to you. They’ll also consider the length of your credit, your down payment, your debt-to-income ratio, your total assets, and your current income. Your lender will take a holistic view of your financial situation to determine whether they’ll extend credit to you.

>> Once a year, you can check your own credit score for free and without negatively impacting it at Annual Credit Report.com.

When you’re ready to get a home loan, contact your local Mann Mortgage home loan experts. In addition to going over your credit and loan eligibility, they’ll get to know you and answer any questions you have about financing the right home for your needs.

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