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By Jean Chatzky
A reader wants to take out a mortgage…let’s walk through her story and two major items she should focus on to prepare for this big ticket loan. Join our journey to owning a home.
Here’s a question submitted to Jean Chatzky on the SavvyMoney blog, followed by Jean’s answer:
I have a medium score of 680…is this enough to get a loan…I’m only paying on a car loan right now…payment is $287.00 month…I have three credit cards…two are not in use…the balance due is zero…the other I use…but pay it off within 30 days….
Sometimes there is not enough information to provide a good enough answer to an interesting question. So we followed up with her and learned the following: She and her husband have a joint income of about $70,000, one car loan and three credit cards. She has student loans, he pays child support ($260/week) and there’s a bankruptcy on his credit report, but it’s over six years old.
Credit score first
The first thing you need to focus on are combined credit scores. Yours is 680. Your husband’s is probably less. That’s not great in today’s market. In school, it would be the equivalent of a C.
Debt-to-income ratio second
The next thing the mortgage lender will do is try to assess how much debt you can carry. You may have heard of the 28/36 debt-to-income (DTI) ratio rule. That means that they’ll want less than 28% of your income to go to housing (mortgage, insurance, HOA, taxes, etc.). The 36% refers to your total debt payment burden, including legal obligations like child support, alimony, auto leases, and legal judgments. If your total is low, that means that if something goes wrong, you still have the income and cash to pay for it. The higher the percentage, the less flexibility you have in your day to day spending and the more likely you just won’t be able to pay it back.
In this case, you’re probably already pretty close to the 36% DTI limit without a mortgage. Child support is currently 19% of your pretax income, so that means that all your other debt / lease expenses (including your mortgage) would have to come in around the same level as your child support. Given your credit cards, auto loan, and the upcoming student debt, it sounds like you’re close to that level even before you put in rent / mortgage.
Given the mortgage industry rules of thumb (28% / 36%), you’re probably not a great mortgage candidate.
What do you do now?
Knowing that, what do you do next? Take your time and rent for a while. Rebuild your credit, pay off your debts, and save for a down payment while living in a house that will be cheaper and offer you the flexibility you need to respond to the job market. Lots of luck!
Free Quarterly Credit Score for Alliant Members
Alliant makes it easy for its members to monitor their credit scores by providing them in Alliant Online Banking. Updated each quarter, credit scores display in the right sidebar of members’ main Accounts page. This is not a hard pull and will not impact the member’s credit rating. Not all members will have their credit score displayed in Alliant Online Banking. You can opt out at the credit scores details page on Alliant Online Banking.
GreenPath Debt Solutions
As a member of Alliant Credit Union, you’re eligible to take advantage of GreenPath Debt Solutions, one of the industry’s most respected financial counseling programs – for free. To learn more about the financial counseling available free to Alliant members, visit the GreenPath Debt Solutions website.