Impact On Debt Versus Credit Scores

Impact On Debt Versus Credit Scores

There is a negative impact on debt versus credit scores. If you have credit cards with high credit balances, that will negatively impact your credit scores. The good news is that by paying down your credit card balances, it will boost your credit scores. Here is the scoop when it comes to impact on debt versus credit scores:

  • Did you know that having too much debt can have an adverse affect on your credit rating?
  • It’s true.
  • Even if you always pay your bills on time, having a high amount of debt can drop your credit score and having a lower credit score can hurt you if you need a mortgage.
  • When you apply for a loan, lenders pull your credit to find out how risky a borrower you are.
  • The higher your credit score, the less of a risk you are to lenders and the better loan you’ll be able to get.

Debt Versus Credit Scores Versus Debt To Income Ratios

Mortgage lenders look at the following factors when evaluating borrowers for credit approval:

  • Borrowers credit scores
  • Borrowers income
  • Borrowers debt
  • With the combination of the borrowers debt and income, the lender will determine the borrower’s debt to income ratio
  • Debt to income ratio or DTI  is the ratio between how much debt you have to the amount of income you make
  • For example, if you make $100,000 and you have $30,000 in debt your debt-to-income ratio would be 30 percent
  • Keep in mind that debts counted in the DTI calculations are only debts that report to the credit bureaus
  • Debts like child care, car insurance, cell phone, utilities, elderly care, and health insurance do not count when mortgage underwriters calculate debt to income ratios

The Federal Housing Administration (FHA) requires that your monthly mortgage payment combined with your non-housing debts do not exceed the following:

  • If your credit scores are 620 FICO or higher, the maximum front end debt to income ratio is capped at 46.9% DTI and the back end DTI is capped at 56.9%.
  • If your credit scores are lower than 580 FICO, the maximum debt to income ratio you can have to get an automated approval per Automated Underwriting System is 43% DTI.
  • Borrowers who require higher credit scores to qualify for mortgage, lenders have a tool called FICO Analyzer which will state how to maximize a borrower’s credit score. It may be paying down certain amount of credit card balances, paying off collections or charge offs, or other quick fixes to boost your credit scores.

Raise Your Credit Score

Many people are under the belief that by having too much debt will hurt their credit scores. If you have too much debt on our revolving credit account, paying down the balance of your credit card to 10% of your credit limit will boost your credit scores. However, closing out your active credit card account will hurt your credit scores.

  • Closing an account does not remove it from your report and the debt (unless paid off) would still appear on your credit report.
  • It’s also a mistake to move your credit card debt from one card to another, since this does not reduce the amount of debt you have.
  • The way to start raising your credit score is to pay off your debt.
  • You still need to keep some revolving debt and to keep paying your bills on time to prove that you are a trustworthy borrower.
  • The trick is to find the “sweet spot” –the point at which you don’t have too much debt and yet can still maintain a good credit score.

If you’re buying a home or looking to refinance your mortgage, take some time before you do so to pay off as much debt as you can. Raising your credit score can help you qualify you for a lower interest rate, and thus a lower monthly mortgage payment.

Qualifying With Lender That Has No Overlays

The Gustan Cho Team at CrossCountry Mortgage has no overlays on the following:

  • Minimum credit score required on FHA Loans is 580 FICO and no overlays on FHA Loans.
  • You do not have to pay outstanding collections and charge offs to qualify for FHA Loans.
  • No overlays on VA Loans with a minimum of 580 FICO Credit Score 
  • No overlays on USDA Loans
  • No Overlays on Conventional Loans
  • NON-QM Loans for borrowers one day out of foreclosure and/or bankruptcy
  • Bank statement loans where no W2s, 1099s tax returns required

Credit Scores Versus Mortgage Rates

Credit Scores has impact on mortgage interest rates. The higher your credit scores, the lower your mortgage rates. Here are the impacts on credit scores and mortgage rates:

  • For FHA Loans, the down payment has no impact on mortgage rates. Just credit scores. 
  • To get the best FHA mortgage interest rates, you would need a 740 FICO credit score. Minimum credit scores required to qualify for FHA Loans is 580 FICO.
  • FHA requires 3.5% down payment on a home purchase.
  • With Conventional Loans, credit scores has more of an impact on mortgage interest rates because Fannie Mae and Freddie Mac are not insured by government entities like HUD, VA, or USDA.
  • To get the best conventional interest rates on Conventional Loans, borrowers would need 740 FICO credit scores and at least 20% down payment. Minimum credit scores required to qualify for Conventional Loans is 620 FICO.
  •  VA Loans do not require any money down on a home purchase and has one of the most competitive mortgage interest rates. To get the best VA mortgage interest rates, one would need a 740 FICO Credit Score. Minimum credit scores required to qualify for VA Loans is 580 FICO.
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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