No matter your age, any individual who does not work in the banking industry is going to be a newb (newbie) to mortgages. Applying for a mortgage and progressing through the process can be stressful and confusing to most individuals.
To help alleviate some of those negative feelings and get each of you excited for a new mortgage, I’ll be publishing a three part series covering the must-know info from the mortgage world!
Let’s get started.
PART I - How to Determine How Much You Can Afford
Credit Report/Credit Score
- A credit report is a tool that mortgage lenders use to be able to take an aerial look at any previous or current debts you carry and your employment history. Your credit report is also going to show any and all of your identifying information. This information includes: name, address, social security number and date of birth. Your credit report is also going to show any credit inquiries that you have had throughout the previous two years. These inquiries are going to include any that you ask a lender or creditor to voluntarily pull as well as involuntary inquires done by credit companies who send you pre-approval letters in the mail.
- Lastly, your credit report is going to show all public records and collection items. These items could include: bankruptcies, foreclosures, liens and any past due items such as a medical bill. All of these components then factor together to generate your credit score.
- A credit score is a three-digit number that appears on your credit report. Credit scores range from a lowest low of 300 to a maximum of 850. Your score is determined by your past credit history. When we pull your credit report for a mortgage, lenders look at three different reporting agencies: Equifax, Experian, and TransUnion. Most of the time, lenders will take an overall average of your three credit scores to help determine the outcome of your application. Remember: Your credit score is only one aspect to your application review, but it is an important factor nonetheless.
- If you want to take a look at your personal credit score, we advise you to use www.annualcreditreport.com. This site is the safest free credit report available. This pull does not adjust your scores.
- This is a ratio that compares your current monthly debts to your gross monthly income. Your current monthly debts could include: House payment, property taxes, homeowners insurance, credit card payments and car payments. These are all the items that will come up on your credit report, as there are creditors sending information to the credit bureau on your performance.
- Student loans can also be factored into monthly debt obligations, under certain circumstances, check with your loan officer to determine whether your student loans apply. To compute your monthly debt, you would just add these items together and the sum is your total monthly debt.
For instance: $500 rent + $150 car payment = $650/mo expenses
- To calculate your gross monthly income, if you are paid hourly, we would look at your hourly pay rate and multiply that by how many hours you work each week on average and then multiply that by 52, for the number of weeks in a year. This number should show your annual salary, to determine your monthly salary we would then divide this number by 12, for the number of months in a year. (Hourly Rate X Average # of Hours Worked Per Week X 52)/12.
For instance: If I work full time for $10/hour- ($10 x 40 x 52)/12 = $1,733.00/mo. This figure is my gross monthly income.
- Once your total monthly debt is determined and your gross monthly income is calculated you can then determine your debt-to-income (DTI). To figure this number you will take you total monthly debts and divide it by your total monthly income. This number should come out to a decimal and you will want to multiply by 100 to show as a percent. (Total Monthly Debts/Total Monthly Income)X100.
For instance: ($650.00 / $1733.00) x 100 = 37.5% DTI ratio
- When looking at a DTI, we want to make sure that you can handle all of your bills, including those emergencies and home repairs that sneak up on you. Some lenders guidelines state that they like a client’s DTI to be around 36 percent or lower. This just means that your total monthly debt is equal to 36 percent of your total monthly income. These can vary by institution and circumstance. Your loan officer will guide you through this process.
- Once your analyst/loan officer has looked over your credit report and completed an initial DTI ratio calculation, they will be in touch with you. As long as all of your documents and numbers meet the financial institution guidelines they will supply you with a pre-qualification letter. This letter gives you the peace of mind to know the bank has looked over your initial loan request and are willing to work with you going forward as long as your financial obligations do not change.
The information may seem daunting, but at First National Bank and Trust Company, we are committed to standing by your side throughout the entire mortgage process.
Ready to get started on your new mortgage loan? Contact First National Bank and Trust Company’s mortgage team at (217) 935-2148 or at firstnbtc.com. We look forward to speaking with you soon.
In the meantime, stay tuned for the next two parts of navigating Mortgages for Newbs.
Kendra Martin NMLS#: 1809857
FNBT NMLS#: 746401