Today we will discuss the three digit number that lenders use to assess the likelihood that you will pay off your loan or credit card. Your credit score doesn’t only allow you to get approved for a loan, it also may bump you into another category, making your interest rate higher or lower. Your credit score is determined by the factors in your credit report.
Credit reports are based on credit history, credit inquiries, and public records and collections. Factors in your credit report include all facets of credit cards : quantity, how many are open and how many have been closed, how long you have had them in use, how much of the available credit is being utilized, payment history and late payments.
Another factor in your credit report is how many recent credit inquiries you’ve had. You have the ability to check your score as often as you want, and it won’t negatively affect your score. However, when lenders are making credit inquiries, this can negatively affect your score.
Finally, public records and collections show up on your credit report. Any information on overdue debts or collection agencies will show up on your report. I actually had this happen recently! I noticed there was a collection agency that was reporting on my credit report. I looked into it (which you have to do with LOTS of patience, just be warned!) and it turned out to be a $95 charge that was from 7 years ago. I had not received a bill, I had not received a phone call ….. incredibly frustrating, but these things can happen, and if you keep a watchful eye on your credit report, you’re likely to catch it.
Your credit score is not the end all, be all when applying for a loan. The lender will take a look at your score, but they will also evaluate your income and expenses. Be prepared to share pay stubs, tax returns, and other proofs of employment and income. Lenders will take a look at disposable income as well as debt-to-income ratio. Disposable income is figured by taking your gross monthly income and subracting regular expenses and debts. The number you get after that is your disposable income. To figure your debt-to-income ratio, add your monthly debts (mortgage, car payment, credit cards payments) and divide by your total monthly income BEFORE taxes. While there is no magic number that will get you approved, 43% is typically the highest DTI that you can have and qualify for a mortgage. What are your options if your DTI is too high? Basically, your only options are to either increase your income, or pay off your debt.
Your DTI score will not be found on your credit report. However, if you have lots of credit cards with high balances, it will affect both your DTI and your credit score, because your credit utilization ratio is figured into your credit score.
Keep in mind that whatever your credit score is, whatever your credit report says, and whatever your DTI ratio is, your day-to-day expenses and living expenses are not figured into this. Always make decisions based on what will work best for you. If you are going to be stretched too thin each month, but you can swing the payment, it may be a financial risk to try to move forward with the loan. You are ultimately in charge of making the most logical decision based on your situation as you know it.
Another important piece to this puzzle, if you’re looking to build a home, is trying to decide how much you want to spend. A good place to start is our CUSTOMER WORKSHEET. You can fill that out and get some numbers going in your head, and talk to EMILY or LISA to decide which direction you want to go. To help you get started, check out these Joyner Homes Communities –> THE BOULDERS, THE RIDGES OVER BRANDYWINE, MCKENZIE GLEN, and SUMMERSET.