2 more tips to help mortgage borrowers in 2014

Karen Mayfield
Posted by Karen Mayfield
Mortgage Banking

Polyana da Costa at Bankrate.com wrote a good post recently, “Top 10 tips for mortgage borrowers in 2014.” I was glad to see she led with “document your finances,” as the need to provide thorough documentation early in the loan approval process is key to a worry-free close in 2014.

Middle-aged man signing documents at table while wife looks over his shoulder.Her piece did get me thinking about what added advice I would give borrowers heading into the 2014 home-buying season. I came up with #11 and #12:

#11: Understand debt-to-income.

To abide by new federal mortgage rules, lenders are very focused on your debt-to-income (DTI) ratio, which looks at all the money a borrower takes in each month – salary, government benefits, investment income, etc. – and compares that to a borrower’s total monthly payments for credit cards, student loans, alimony, property taxes, and the mortgage they are seeking. Generally, that DTI ratio needs to be 43% or lower.

Because the guidance on what counts in income and debt is fairly detailed, I encourage people to talk to a mortgage professional. Mortgage bankers  all spent a lot of hours in training to learn the new federal rules, so they can help you to include accurate numbers on the income and debt sides of the equation.

We had a recent customer, for example, whose debt-to-income ratio was too high for the loan that was needed. Fortunately, we had conversations and realized the customer was able to pay down debt to lower the DTI and have the loan approved. Review your debt and income picture. Do you have a credit card with lingering holiday gift debt, for example, that you can pay off?

It can’t hurt you to have those types of conversations with a mortgage lender sooner rather than later to understand debt-to-income rules and your financial situation. If you don’t gain a clear understanding of DTI, you may unwittingly limit your housing and loan options.

#12: Understand the cost of your credit score

Many of us have a general idea of our credit score. What we don’t pay much attention to is exactly what that score costs us, and how improving it could save us money when applying for a loan. One way to get a rough idea of how improving your credit score might save you money on a mortgage is through the Loan Savings Calculator on myFico.com.

As with debt-to-income, having a conversation early with a mortgage expert can help you strategize around your credit score and loan options. Even if you are not ready to buy a home or apply for a loan, talking to a mortgage professional can clarify a lot of the aspects of getting a mortgage.

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