With all of the talk about the importance of your credit score, it is easy to forget that the bank’s analysis of your credit report goes far beyond the three numbers that TransUnion, Experian, and Equifax label you with. Sure, you could have an 800 credit score; but that doesn’t mean that you are getting that mortgage you want. When considering a mortgage application, your lender will also consider both your housing ratio (your monthly housing expense compared to your monthly income) and your debt-to-income ratio (the percentage of your monthly income that goes to making your minimum monthly debt payments). These two numbers can — and often do — make or break a mortgage application.
That being said, if you find yourself carrying a little extra debt because of that last set of rims you just had to have, there is hope. Take a USDA loan for example; the USDA requires a housing ratio of less than or equal to 29% and a debt-to-income ratio of less than or equal to 41%.
If you have a credit score of 660 or higher, you are eligible for a debt ratio waiver without any compensating factors. However, if your score is sitting below 660, the bank will look at the following compensating factors:
- High cash reserves after closing
- Potential for increased earnings or career advancement
- The payments on your new mortgage are similar to what you currently pay in rent or for your monthly mortgage payment
- A history of conservative use of credit
- Additional income that was not included in your qualifying income; a part time job that lacks a stable job history or a potential bonus for example
- A low total obligation ratio despite having a high housing ratio
While it is tough to rely on these waivers, they are a great fallback in a pinch. If you have an excellent application, but are lacking in the debt ratio department, it may be worth a shot asking your lender about a waiver.