Credit scores do not reflect income -- credit bureaus do not
have income reported to them. However, real estate lenders look at the consumer
debt-to-income ratio -- the amount of monthly debts in relation to the amount of
earnings. Consumer debt is more highly regarded/scores higher if total debt is
under 20% of net income, or total monthly payments on all debts is less than 35%
of monthly gross income.
Lenders want the total debt ratio (the percentage of total
monthly payments, including the new mortgage, to income) to be less than 33% for
a typical conventional mortgage.
This means the new mortgage payment, credit card payments, and
all other monthly debt payments should not equal more than about one-third of
the monthly income. Lenders want the mortgage debt ratio (the percentage of the
new mortgage payment to income) to be less than 28%.
Non-prime loans have lower standards; some lenders allow
debt-to- income ratios as high as 55%. Borrowers with less than perfect credit
qualify more easily for a non-prime loan compared to an "A-paper" loan.
Once you total your monthly expenses and determine your debt
ratio, you can estimate how much you can afford for a house payment. For
example, if your income is around $3,000 per month, you can afford a home with
payments around $1,000 per month (including taxes and insurance) with a
conventional loan, if your other debt does not total more than 5% of your
For investors, these equations change. Lenders expect 10%-25%
down on investment property and allow about 75% of the rental income to offset
the debt ratio.
Understanding your credit helps you manage your credit so you
can obtain real estate financing, either for the house of your dreams or for
your financial future.
Professor Jeanette Fisher is the author of "Credit Help! Get the Credit You Need
to Buy Real Estate," "Doghouse to Dollhouse for Dollars: Using Design Psychology
to Increase Real Estate Profits," and other books. Forget what you've been told
about credit. Get the credit you need to buy real estate. Visit Real Estate
Credit Help Center: http://recredithelp.com/