DTI vs Credit Score: Which One Actually Gets You Approved?

Hey guys, welcome back to another week of Mortgage Matters in Minutes. I'm your host Brent Rasmussen, owner of Mortgage Specialists. I should begin this video off today and talking about approvals, meaning why is the debt to income ratio much stronger and more important than your credit score? And that is because people just don't realize what debt to income ratio is. And I can share since 2008, DTI or debt to income ratio is a much stronger factor in loans performing than your credit score alone. So let's get into it. Let's talk about it today of why that is in mortgage and why that makes a difference and educating you to be prepared to buy a house. So again, since I would say last six, seven years, people have been getting access to their free credit score that they feel if they can make their payments and show their credit score is high that no matter what their payments are, they'll be able to make those. And that's not a true reflective of what your credit score is doing. It's telling you that yes, based on your budget and your affordability, you have made your payments all in time. But let's say we skew everything and you make $5,000 a month in income or $10,000 a month in income, but now your bills are five or $10,000 a month. At some point in time, you're not going to be able to make those happen. So, as interest rates have creeped up, as taxes and insurance have creeped up, the most important factor in qualifying for a mortgage loan is your debt to income. I would tell you we focus on that calculation always, much more importantly than the credit score. While you may have a very high credit score, if you have a high debt to income ratio over a certain threshold, it doesn't matter. or they'll cut you off and say, "We're not giving you a loan because you don't have enough income to support those payments moving forward." That's the same whether you're buying a business, whether you're taking on a car loan, a credit card, or a mortgage. You have to have enough income to offset the payments that you are about to make. So, let's talk about what debt to income ratio is. Most people fall their debt by how much they owe, their balance. We care about what the monthly obligations are, the monthly payments. Why do we care about monthly? Because all of your bills are monthly. Car loans, utilities, rent, mortgage, credit card payments, student loans, everything you break down to is monthly. So, if we can get your income calculated to a monthly basis, we can then calculate this debt to income ratio. And generally speaking, you want to be somewhere between 40 and 50%. Meaning you make $1,000 a month, you can have $400 to $500 worth of debt. But let's say your credit score is much lower. They might only allow you to have 30 to 40%. So what we can see and what we can talk about is having enough income to offset debts always makes a much more impact on qualifying than not. Let's give you two examples. Let's say someone has a 780 credit score and which is a high credit score, but they have a high debt to income ratio, 46 47%, 48%. Compared to someone that has a 660 credit score and a debt to income ratio of 20%. Believe it or not, the loan might be easier to get done with a lower credit score and the lower DTI than the higher credit score and higher DTI because they've proven through thousands and thousands of loans if you do not have enough income to make your payment, you're going to be in default and go into foreclosure. And the percentages are way against you and are much higher for that to happen than not based on someone that has a very low debt to income ratio. So, we see this happen almost every day. And this last few weeks, it's been a lot of calls with people saying, "I have perfect credit scores." That's great. That's so one variable that we look at is credit scores, and that's going to set your interest rate. But qualifying comes down to your payments and the new mortgage payment divided by your income. And we're only concerned with items that are on your credit report and the new mortgage payment, not your rent or maybe not your house payment. moving forward to calculate that math. So, as you can see, focusing on your credit score is still very, very good. Credit measures how much payments you've made on time, what you've borrowed, how you've repaid it back. But DTI is a much stronger variable to show you have to have enough income to qualify for that particular loan. So, if I can share anything with you in getting preapproved, it's going to be looking at your debts and your income. So the only way to adjust and change that is to make higher income and pay down your debts. So that percentage goes down. Where some people want to just continue to focus on their credit score, which is great. Nothing wrong with it. But when we're talking about approval versus interest rate, debt to income ratio is what you want to follow all day long. So give us a call if you have any questions. We'd love to help calculate that for you. Go over the numbers and plan in advance. Some people contact us a day or two after looking at a house or before looking at a house where many of times we went on to look at your debt to income ratio six to 12 months in advance so you can make a plan if for some reason your debt to income ratio is going to be too high to qualify for that particular loan. So I'm Brent Rasmussen, owner of Mortgage Specialists, NMLS number 5918. I'd love to chat with you at 4029915153 or you can check us out on our website at mtg-specialists.com and we'll see you here next time. Thanks so much. Mortgage specialists. Driven. Trusted. Reliable.