Is Your Credit Ready to Take on a Mortgage?
by: Shawn Henson
To help determine whether you’re ready to take on a mortgage or not take a look at your finances. Two things that you really want to take a look at are your credit score and current debts. These two factors greatly determine how much home you can afford.
Credit Scores.
What determines a good credit score depends upon the scoring model and the lender. Some credit reporting companies will score you on a scale of 300-900, or on a scale of 350-850. In either case the higher the number the better. The more popular scoring model is 350-850. In general if your credit score is better than 750 you have excellent credit. You should be able to get the best interest rate on the market. But even if your credit score dips to 700 some companies will still consider you a top tier customer and give you the best rate they have to offer. In general 680-750 is considered very good, but again that is considered in the eye of the beholder when it comes to lending companies. A credit score below 620 will make it hard to secure a mortgage, as anything below 620 is considered poor credit for buying a home. There might still be some mortgage lenders who will be willing to work with you. However, this will mean a higher interest rate. Ideally you want your credit score to be above 720 to secure a premium loan. If you need help with your credit visit one of our sponsors
Current Debts.
To help determine how much you will be able to borrow there are two numbers you should remember, 28 and 36. No more than 28% of your gross monthly income (before taxes) should go towards housing costs. This includes your mortgage payment, property taxes, homeowner and mortgage insurance, and home owner’s fees if applicable. Your total monthly debt payments should not total more than 36%. Total debt includes housing costs, payments on car loans, student loans, and other long term debts (debts with more than ten months left to repay.) For example Charlie makes $3,000 a month. Ideally his total monthly debt payments shouldn’t exceed $1,080. Of that $1,080 no more than $840 should go towards housing costs and no more than $240 should go towards other monthly debts. If your monthly debts greatly exceed 8% of your monthly income you may want to visit one of our debt consolidation sponsors.
How This Affects the Amount of Home You Will Be Able to Afford.
First of all your credit score can have a direct impact on how much home you can afford. For instance let’s say you qualify for a mortgage with a monthly payment of $570, a 30 year mortgage at 5.5% interest will get you a $100,000 mortgage, at 6.5% it becomes a $90,000 mortgage, and at 7.5% interest you’re looking at a mortgage that’s a little over $80,000. Point being the better your credit score, the better the interest rate, which means you’ll be able to afford a whole lot more home for your money.
How Excessive Debt Could Affect Your Qualifying Mortgage Amount.
Remember our above example with Charlie. Charlie makes $3,000 a month. Ideally his total monthly debt equals $1,080 or less, of which $840 went towards housing costs and $240 went towards other long term debt. With a 30 year mortgage at 6.5% interest Charlie is looking at about a $117,000 mortgage. If Charlie’s non-housing debt equaled $340 a month then he could only afford $740 a month towards housing. Now Charlie is looking at a $105,000 mortgage. These figures factor in that property taxes and insurance (included in housing costs) would equal approximately $90 a month in Charlie’s case.
About The Author:
Shawn Henson
Owner of http://www.clickmortgagequotes.com
March 2006
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