first time home buyer - questions re FICO and repairing credit

[Anonymous]

Hi- we're first time home buyers with lots of questions! There is so much information out there and some of it is conflicting, we'd love your input and thoughts. 

1) Where do we pull the actual FICO score used by lenders? We have various credit reports but need to know what the lender will be looking at.

2) Our debt to income ration is pretty good (16%) - how does that affect our ability to get a mortgage, and how does our income get considered? I feel like all that matters is the FICO score.

3) Does your credit need to be completely clean to be eligible??

4) I have heard people say that getting a car loan or credit card doesn't help your credit but could actually hurt it. Is that true or should we pursue credit approvals like that?\

Thanks for your help!

[Anonymous]

---

@Anonymous wrote:

Hi- we're first time home buyers with lots of questions! There is so much information out there and some of it is conflicting, we'd love your input and thoughts. 

1) Where do we pull the actual FICO score used by lenders? We have various credit reports but need to know what the lender will be looking at.

2) Our debt to income ration is pretty good (16%) - how does that affect our ability to get a mortgage, and how does our income get considered? I feel like all that matters is the FICO score.

3) Does your credit need to be completely clean to be eligible??

4) I have heard people say that getting a car loan or credit card doesn't help your credit but could actually hurt it. Is that true or should we pursue credit approvals like that?\

Thanks for your help!

---

1) I'm not entirely sure. There is a standard mortgage scores for each of the different agencies. Each agency has one model that it prefers. I can't find them right now, but I'm sure that someone else can help with that.

2) I wouldn't classify that as good DTI. Mortgage lenders look at front-end DTI and back-end DTI in determining how much of a loan to give you. Front-end is housing costs (mortgage, taxes, insurance, etc.) divided by gross income. The normal threshold is 28%. Back-end DTI takes into account all of your various debts, including car loans, credit cards, tax liens, and anything else where you have to make a monthly payment. Generally, lenders don't want back end DTI to exceed 36%. Since you already have a DTI of 16%, that implies that your back-end DTI will be the limiting factor and that you will only be able to put 20% of your income towards your monthly housing payments. Note that these are figured out BEFORE income taxes are accounted for.

3) No, your score does not need to be completely clean to be eligible, but you can't have had any derogs for the last year or two (I don't recall which). 

4) Getting credit cards and car loans CAN help your credit, or they can hurt it. It depends on your specific circumstances. As a general rule, I advise people not to apply for credit for 6 months before applying for a mortgage at a minimum, and preferably 1-2 years. If you have 2 years before you apply, you can take more extreme measures to boost your scores than the waiting game that is otherwise required; however, we can't give any advice without knowing your full credit picture (# of cards, limits, other loans, HPs, derogs, etc.).

[CH-7-Mission-Accomplished]

There is a lot of confusion about what the DTI ratio is.

For most people they add up all their debt balances (CC's, auto loans, student loans) and divide by their annual income and assume that's correct.  So if you made 100K income, had one auto loan for 20,000, you would say "my DTI is 20%."

This is not the DTI used in mortgage underwriting.  There they are looking at monthly mortgage expense and monthly debt payments.

Top ratio = Principal, Interest, taxes, insurance + HOA fees = Housing debt ratio.

Bottom ratio = Top Ratio + monthly payments for auto loans, student, loans, minimum due on CC's, alimony/child support.

So if you earn 8K/month total gross income, your housing ratio would ideally be not over 28% so total housing expense = $2240.

With 8K/month total gross income they would want to see the bottom (or back end) ratio not exceeding 36%) so $2880.

So in order to fall within these "ideal" guidelines our nonhousing monthly debt would not exceed ($2880-$2240) $640.

So no more than $640 for all your car payments, credit card payments, child support, student loans, etc.

The debt guidelines do not include things like utiities, food, insurance, tuition, or anything that is not a true debt payment or true monthly housing expense payment.

The two most confusing terms used on these boards is "debt to income ratio" and "date of first delinquency."

In terms of DofFD, many people incorrectly assume this was the first time they had a late payment on their account.  You could have had a 30-day late 5 years ago and brought the loan current and then recently had the loan go bad so it went 30, 60, 90 .... C/O.  In this case the DofFD is that most recent 30 day late.

I kick myself for bringing several of my BK accounts current while trying to meet payment plans,  Had I just let them go I would have been further ahead and the items would have fallen off much sooner.  Live and learn.

[StartingOver10]

To add to the two posts above: you get your actual mortgage scores here:  http://www.myfico.com/Products/FICO-Score-3-Report-View/

The lender will use the mid-score of the 3 scores. 

[Anonymous]

thanks!

[Anonymous]

The only credit we have are our student loans...I guess I am concerned that it doesn't show ANY positive credit or current lines. What would you do?

[frugalQ]

you will need to have 3 credit tradelines.  if you don't have 3 showing on your credit report, you will need to provide alternate tradelines...something like insurance or utility bills.

[Anonymous]

When do you plan to buy?