Start by looking at your three-digit FICO credit score. This number sums up how well you’ve handled your credit and paid your bills. The higher this number, the more likely you are to be ready for the financial responsibility of a monthly mortgage payment.
FICO scores range from a low of 300 to a high of 850, with most lenders considering scores of 800 or higher to be excellent ones and those of 740 or higher to be very good. If you are close to those scores, it shows that you’ve done a good job of paying your bills and using your credit, skills that are essential when you take on the added responsibility of a monthly mortgage payment.
You can buy your FICO scores from the national credit bureaus, which are Experian, Equifax and TransUnion. Your bank, credit union or credit card provider might also provide you with a version of your credit score for free.
Debt-to-income ratio
Your monthly debt load is another factor in determining whether you can take on a new mortgage payment. Your debt-to-income ratio can come in handy here.
Lenders typically want your total monthly debts — payments such as your new mortgage payment, auto loan payments, student loan payments and your minimum monthly credit card payments — to equal no more than 43% of your gross monthly income, your income before taxes are taken out.
To determine your debt-to-income ratio, total your recurring monthly payments and divide those by your gross monthly income. Be sure to include your estimated new mortgage payment. For example, if your car loan, mortgage, student loan and credit card monthly payments come out to $3,000 and your gross monthly income is $7,500, your debt-to-income ratio is 40% — under that important 43% figure.
Your savings
You should also have plenty of savings built up before you apply for a mortgage. You’ll need savings to cover your down payment and the closing costs that your lender charges. But most lenders also want you to have enough savings to cover at least two monthly mortgage payments. That way, if you suffer a temporary loss of income, you can still manage at least two months of mortgage payments, giving you a chance to replace or recover that lost income.
If you estimate that your monthly mortgage payment, including any money you’ll spend on property taxes and homeowners’ insurance, comes out to $2,300, you’ll need at least $4,600 in savings. And that’s in addition to any money you’ve saved for a down payment and closing costs.
If your credit score, debt-to-income ratio and savings are strong, the odds are high that you are ready to take on the responsibility of a mortgage payment. If they need work? It might be best to wait to apply for a home loan until you build up your credit score, lower your debt-to-income ratio and add to your savings.
Claudine Steinfurth
REALTOR®
(216) 409-4039
csteinfurt@aol.com
RE/MAX Above & Beyond
7570 Chippewa Road
Brecksville, OH 44141
