What compensating factors help get buyers qualified outside of FICO scores?

Your FICO credit score is an important element of qualifying for a mortgage – but maybe less important than you think. While lenders traditionally look to a high credit score as in indicator of a responsible borrower, this has started changing in recent years. There are other factors that may qualify a person for a home loan.

The reason many lenders are turning away from credit scores as a primary qualifier has much to do with changing consumer behaviors. Credit usage is down, particularly among groups like millennials. Over a third of people under the age of 30 do not have a credit card, according to a survey by CreditCards.com. This means that their scores may be lower than average, even nonexistent.

“Lack of a credit score doesn’t always mean the person isn’t creditworthy.”

No score? No problem

But lack of a credit score due to not using credit doesn’t always mean the person isn’t creditworthy. The fact that many younger people have taken lessons from the economic ups and downs of the past few years and avoided using credit may show a savviness that could translate into good borrowing habits.

So what factors impact lenders when it comes to approving a home loan? A recent survey of loan officers conducted by FICO revealed that debt-to-income ratio was the biggest factor in approval by a large margin. Nearly 59 percent of the lenders surveyed said that a high DTI ratio would give them pause when considering financing a borrower, versus the 10 percent who said that a low FICO score would be a deal  breaker.

What is a “good” DTI ratio?

For borrowers looking to obtain financing, DTI ratios over 35 to 45 percent will still be a tough sell. This isn’t an unreasonable expectation by any means: A person carrying a DTI of 45 percent who makes $5000 a month would only end the month with around $500 after paying their respective debts. This effectively hobbles a person’s ability to save in any meaningful way, including for a mortgage down payment.

Is a FICO score good for anything?

None of this is to say that FICO scores are meaningless. Mostly, they impact the mortgage rate you qualify for. A lower score means a higher interest rate which, over the lifespan of your loan, could cost you thousands of dollars more.

Borrowers with a low or nonexistent FICO score should focus on ensuring that the amount of debt they are carrying on a month-to-month basis is below 45 percent in addition to improving their score. This means that you will have adequate savings and the ability to showcase yourself as a responsible borrower.

For more tips and low rates on home financing, contact New Penn Financial today.

Sources: Simplifying the home-buying process for first-time home buyersThe true cost of a mortgage: The present versus the future


For more information, contact Ryan Hatleli (Branch Manager NMLS#174748) at New Penn Financial;
(605) 877-3485; rhatleli@newpennfinancial.com; http://www.newpennfinancial.com/rhatltli

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