Qualifying for a mortgage loan used to be a
simple issue. 28/36 qualifying ratios. 28% of your gross income for
the housing costs and 36% of your gross income for all debts. (Click
here to see how this old method would have qualified you.) You fit the
ratios or you didn't. Plain & simple. This tried and true method
in the lending industry left out a lot of well qualified people however.
How could that be, you ask?
First of all, everyone's spending habits aren't
the same. Someone with a limited income, a good coupon clipping ability
and a little common sense can really stretch a dollar. Cultural attitudes
may stress saving instead of spending on material goods. All of this added
up to a large segment of the population being left in the dark.
Well, the Dark Ages were pushed aside by credit
scoring. Credit Scoring is a method whereby the credit repository (Transunion,
Equifax & Experian) rates an individual's credit profile based on a number of
categories. Yes of course they look quite closely at how well one pays
their bills, but many other factors come into play. Areas I have observed
over the years are things like;
At this point in the evolution of mortgage lending, a Borrower
with good credit scores and maybe a few bucks in reserve after closing, can
expect to be approved with Ratios as high as the mid 40s. A bigger down
payment might stretch it even further.
How much credit you have. Having little
or no credit is bad in this area. There is little to base a rating
on. Having too much credit hurts in other ways, see below.
Having credit but not using it. As
noted above, without payment patterns it is difficult to apply a score since
there may not be enough history.
Types of credit. An individual with a
lot of revolving debts seems to get hit harder on scoring. Not as much of a problem
if they have a lot of installment loans. Auto, mortgage or personal
loans. It seems that the consideration here is someone who takes out
credit set to pay back in a specific period of time is more organized in
Usage of credit. As noted above, not
using credit makes for a lower score since there isn't much history to base
a score on. But overuse of credit is damaging also. One
particular area seems to be maintaining high balances on revolving credit.
In other words, let's say you have a credit card with a limit of $4,000.00
and the balance is always up around $3,800 or so. That hurts!
The scoring formulas seem to read that as if you can't get the balance down
and therefore you're a risk for new credit because more credit will only make
it worse. Now maybe you're using the card alot and paying it off every
month to build up airline miles or points for buying a car. Doesn't
matter. The systems cannot read that into it. They just see
consistent high balance versus limit.
Number of new accounts. Where people
get hurt here is when they shift balances from one credit source to open
another to save on interest costs. Again, the systems cannot know
that's why you're doing this. The systems see another new account.
This lowers your credit score for a few months and the old account probably won't
show up as paid off for a couple of months. In addition,
if you don't write to the
creditor of the old account to close the account, it'll remain open and it
looks like you have even more credit even though you may have cut up the
card and swore under a full moon to never use it again.
Like to know for sure how much of a mortgage you Qualify
for? Contact me and I'll walk you through the steps and get you on the
road to homeownership!!!