There are many different ways to think about home ownership and financing, depending on your goals. Short and longer term plans, strategy, capacity, capital liquidity are all valuable points of view to consider for home purchasing and selling.
One model we often recommend to our clients at Mortgage Maestro Group is to think about these decisions in three pillars—income, credit and debt. Let’s run through these three key points, including what they mean and how they can help you make smart real estate decisions.
This pillar may seem straightforward, but there are also some subtle points that are valuable to keep in mind. Your income is going to be based on your pre-tax monthly take-home. Mortgage lenders are going to want to consider all sources of income, from base salary to tips, social security, investments, passive income and any other wages. It can be helpful to think of income more as a total positive measure of the money you are bringing in or are going to add during the future, rather than as simply your salary. Bear in mind, there are requirements that often confuse when it comes to a lender’s ability to qualify the income stream for usage. An example, you started earning bonuses in 2021, but have no history of bonus income. This would likely be disallowed since traditionally 24 months of receipt of this variable income is required. Ironically, for terms of real estate transactions, the line between income and debt can blur, but we will get to that next.
The basic definitions of debt are going to apply, just like income, with some exceptions. Credit card debt, existing mortgages, car loans, student loans, alimony payments and the like will all be included. Mind you, you may pay an extra $100/month on your car payment, but underwriters use what you are required to pay for debt ratios. These are often monthly payments that will contribute to your credit report, a measure of your ability to repay money owed that is used to determine future loan eligibility. Some monthly payments, such as a cell phone bill, health insurance or rent, will not be included as debt. That is unless they are paid using credit cards, in which case these types of payments can impact your credit history and credit score. If you are likely many and pay off your credit cards monthly, please let your lender know, this is helpful!
As previously mentioned, your credit score is a number ranging from 300-850, with higher numbers indicating a better credit history. An important lesson to keep in mind is that your credit score is not at all correlated to your savings and income. Often times, taking on a new loan, for example on a vehicle, and repaying that loan on time over an extended period of time can improve your credit score. That is because it serves as a positive example of your ability to repay debt, even though you are taking on new payments. More recently, we have observed that credit cards are playing a larger role in credit scores. Reason; it is open-ended credit and so utilization, balance-to-limit ratios can fluctuate. There are plenty of options when it comes to improving your credit score, which our team at Mortgage Maestro Group would be happy to discuss.
In addition to your credit score, your debit-to-income ratio will give you a great basis for understanding available mortgage options. The ratio will take into account all of the factors mentioned in our income and debt discussion to produce an overall asset picture that will serve as a guide for future real estate purchases and sales. This three-tiered perspective is a great way to get your feet on the ground, and our experienced team at Mortgage Maestro Group can help walk you through the steps of income, credit and debit analysis. Give us a call at 303-779-0591 to learn more!