Expanding the “Credit Box” for Worthy Consumers

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Mortgage lenders and policymakers are taking a fresh look at home-buying standards. In an effort to stimulate the economy, banks and legislators are considering “opening the credit box” to applicants who would normally be excluded from the process. Millennials with little-to-no credit history and consumers with lower-than-average credit scores stand to benefit from easing standard requirements. According to data collected by Ellie Mae, a mortgage compliance and analysis firm, the average score associated with closed home loans was 754 last December, a single point lower than scores accepted in December 2014.

While the powers-that-be claim progress to include the disenfranchised, data linked to opening the credit box tells another story. Regardless of whether regulations change, there are plenty of ways to pursue homeownership in the meantime:

Review your Debt-to-Income ratio. Although your DTI ratio doesn’t directly affect your credit score, it does determine whether you can afford to buy a home. Federal regulations cap mortgage lending at 43 percent of your gross annual income. However, if your DTI ratio is currently high due to other debts, e.g., credit card balances, auto loans, student loans, alimony and child support, student loans, a mortgage lender isn’t likely to approve your application. The reason? Your finances rely too heavily on borrowed funds, increasing your level of risk. In the months leading up to home-buying, review your current debts and aim for a DTI ratio of 36 percent or less.
Save a larger down-payment. Even with a stellar credit score, most lenders require at least 10 percent down before approving a home loan. Not only will a liquid investment reduce your monthly payment, a down-payment of 20 percent or greater eliminates the need for Private Mortgage Insurance. Review our fast ways to save and focus on equity.
Consider the extras surrounding homeownership. Legally, you are allowed to spend up to 43 percent of your monthly income on housing expenses, but “legal” and “feasible” have very different meanings. Buying a home is a way to focus on long-term investing, but you shouldn’t forget the added expenses that affect your current budget. Homeowner’s insurance, property taxes, lawn care and maintenance, and Homeowner’s Association (HOA) fees are just a few of the standard expenses. Include these in your calculations as you consider affordability. Don’t borrow more than you can handle.
Focus on credit repair. Don’t rely on regulation changes to secure a home loan. Take control by focusing on your own financial stability and creditworthiness. Begin by:
- Creating a budget. A monthly roadmap is an essential part of staying on track. Download our free, dynamic template to get started.
- Paying bills on time. Payment history accounts for 35 percent of your credit score. Boost your chances of homeownership by honoring your financial commitments.
- Paying credit card balances in full. As we learned, credit card balances have a direct impact on DTI ratios. Paying your balances in full at the end of each month eliminates high credit utilization, boosting your credit score and reducing your DTI ratio. When it comes to securing a mortgage, maintaining low revolving balances is crucial.
- Practicing discernment. Lenders are wary of credit-heavy applicants. Avoid opening new accounts in the 9 months leading up to home-buying. Too many lines of credit could cause unnecessary problems.
- Learning the rules. These are just a few of the many pathways to better credit. Learn the rules by taking advantage of the information found within our blog and talk to our staff along the way. A professional advocate is a valuable tool on the road to real estate.