Don’t let the title mislead you; there are many more than three important numbers at play during the mortgage process! It could be argued, however, that the numbers we outline below are the most important during the mortgage process. Credit score, debt-to-income ratio, and loan-to-value ratio each play a valuable part in the mortgage process, and having “good” numbers in each category can be the difference between loan approval or denial, or can mean saving thousands of dollars throughout the life of your loan.
Chances are you are already familiar with the concept of a credit score. Whether or not you know your credit score, at the time of application, the loan officer you are working with will pull a credit report. There are two kinds of credit reports; the “hard” check which is done when you are ready to submit a loan application, and a “soft” check, which is done right before closing to make sure no new debts have been added and no derogatory credit events have occurred during the process. While the soft check does not affect your score, a hard check does have a slight impact on your score, typically less than five points. In both cases, the credit report will contain three credit numbers, which are your credit scores with the three main credit bureaus (Experian, Equifax, and TransUnion). A good credit score is important because mortgage lenders use your credit score to determine the likelihood of you being able to pay back your loan. Most loan types have a minimum credit score for eligibility. In most cases, the better your credit score is, the better the interest rate the lender can offer you. Having a better credit score can potentially mean saving thousands over the life of your loan. Have a less-than-stellar credit score? Not to worry; at Southern Trust Mortgage, we offer free credit guidance through our in-house credit expert. Our expert can help you rehabilitate your credit score, helping you achieve the best possible score before applying for your mortgage.
Debt-to-income, also called DTI, is how lenders determine how much you can afford to pay in a monthly mortgage payment when taking your already established monthly debt into consideration. By adding the proposed mortgage payment to your current monthly debts and dividing it by your gross monthly income, lenders will be able to determine whether you can comfortably pay your home’s mortgage. To that end, lenders set DTI limits for their borrowers. The lower your DTI, the easier it may be to qualify. In most cases, paying down unsecured revolving debt to 30% of their limits can not only improve your debt to income ratio but also improve your credit scores.
The loan-to-value ratio, or LTV, is how lenders measure how much equity you have in your home. Think of LTV as the percent you need to pay on the principal balance in order to own your home completely. The higher your LTV is, the more you are borrowing through your lender. For purchases, lenders typically have a maximum LTV, which translates to a minimum down payment. Your LTV maximum will depend on your property type, loan product, loan amount, and whether you’re a first-time home-buyer, among other factors. If your LTV is greater than the lender’s limit, you may have to increase your down payment or find a new property at a lower price. For a refinance, your LTV comes into play if you are looking to cash-out or get rid of mortgage insurance on a non-government loan.
No matter your credit score, DTI, or LTV, Southern Trust Mortgage experts are ready to help you every step of the way during the mortgage process. Contact us today and let us help make home happen for you.