Polish Up Your Credit Scores and DTI to get the Best Rates
With the rise in rates, the power is shifting to buyers in real estate. This could present buying opportunities for qualified borrowers. To get the most attractive financing, though, you will need to keep your financial profile in tip-top shape. Though several factors play a role, high credit scores and low DTIs (debt-to-income ratios) typically dominate the calculation lenders use in determining your rate.
Take Great Care of Your Credit Score
• Always pay your bills on time. People who never miss a payment date, even making minimum payments, earn higher credit scores.
• Pay down or pay off credit card balances and personal loans. Low utilization of your available credit is a plus with credit agencies. If you use a credit card for all your expenses, and if your utilzation is high relative to your credit limits, switching some spending to cash can help.
• Keep older credit accounts open, and don't keep switching creditors. A long track record of responsible use of credit has great value. If you want to cancel some credit lines, cancel the newer ones first.
Improve Your Debt-to-Income Ratio (DTI)
In getting a mortgage, a lender considers the ratio of all of your current monthly debt obligations (including your new mortgage payment) versus your income. The (rough) rule of thumb is to have your DTI at or below 43% of income. Lower is better, so:
• Pay down outstanding credit card balances.
• Avoid making major purchases with credit for several months before applying for a home loan.
• Consider paying down a car loan. Car loans often carry lower interest rates than other debt so paying down other debt first makes more sense.
• Restructure Federal student loans, if possible. Consolidation of multiple federal loans into one federal loan may allow you to lower your payments by extending the loan term (though your interest costs will increase). This can include income-driven repayment plans that may significantly reduce your monthly payment. You can also combine private and federal loans into one private loan which may save money and reduce those payments.
During the loan process, I also have the option of helping you with a “rapid rescore” with the credit scoring agencies to accelerate the improvement of your credit score. Note: Rapid rescoring may only be done with the help of a mortgage professional, not “credit repair” companies.
Also, rapid rescoring is not a means of removing negative information such as late payments or bankruptcies. Contact us for guidance on how, and in what order, to pursue these strategies.
Let's Start Today
These updates and improvements can take several weeks to impact your credit and DTI's, but the efforts are well worth it, because they directly affect the cost of home financing. It's never too early to start, so if buying or investing in real estate is in your future (even a long time from now), contact us for further details.
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