When I was a lender, said all my minimum payments of everything and this is my monthly debt and then I talked my monthly income. So it does not matter the total amount of debt, but the monthly payment for each?
I'm asking this because I currently pay 566/month for my car payment of interest and for me to trade in another car, which is the same (maybe a bit less) than that per month.
Just a little confused . looking for a house to buy in next 6 months. Thanks.
Best Answer: You are confusing 2 separate issues. Debt to income ratios are figured by adding all of your minimum payments in a given month (credit cards, car payment, installment loans, anything that appears on a credit report) plus your mortgage payment inclusive of taxes and insurance and dividing by your gross monthly income(before taxes). This has no affect on your FICO(credit) scores. Part of your FICO score(30%) is affected by your debt to credit limit ratios. This is derived by adding all of your credit limits and dividing by the sum of all of your balances. However, individual accounts weigh just as heavily as the sum of all of your accounts. The rule of thumb is the 30-50-70 rule. Any time your account balance is over 50% of the credit limit on that particular account, it has a negative affect on your credit scores. Once you go over 70% of the credit limit, it reduces your credit scores even more. Once you "max-out" a credit card or, worse yet, go over your limit, the effect is huge. Conversly, it works in the opposite direction as well. Once you bring your balance below 50% of your credit limit, it starts increasing your FICO score. Bringing your balance below 30% of your credit limit raises your scores even more. Another mistake people make is that they think closing or not using a credit card helps them. This couldn't be farther from the truth. Closing a credit card that has been paid in full would increase your total debt to credit limit ratios and have a negative effect on your scores. Not using a card in several months would cause that account to be deemed inactive-regardless if the account is still open and thus hurt your scores and overall credit rating. Best rule of thumb is to use a card at least every 3 months and pay the bill once you receive the statement. As far as your looking to obtain a 38% debt to income ratio for the purpose of finding a mortgage-that's not necessarily true. Most conforming products, especially with full-documentation loans allow a debt to income ratio of up to 45%. Some lenders allow more in the sub-prime or Alt-A markets. Sounds like you need to find a mortgage broker that knows his/her industry to guide you through this. The first thing I do when a client approaches me to help them finance a home is to go over all of these things, helping them to have a solid understanding of exactly where they stand and what they qualify for.
Reply:I highly doubt that it would ruin your changes since you a re not making a new debt.
Reply:So getting a loan that leaves me with the same monthly payment wouldnt matter much 6 months before mortgage? I'm not incurring more monthly debt but staying the same. Thanks for the info!!!
Reply:minimum payments are all that is looked at to calculate debt to income.
remember, the minimum payment is a 'function of' the TOTAL debt.(ex: you wont have a $10 minimum payment on a credit card with a $10K balance)
so the banks just look at minimum monthly obligation because they know this coorelation exists