Credit Score & Debt-to-Income Ratio Guide
Your credit score and debt-to-income (DTI) ratio are two of the most important factors in mortgage approval. Understanding and improving both can save you tens of thousands of dollars over the life of your loan.
How Your Credit Score Affects Mortgage Rates
Your credit score is one of the most powerful numbers in your financial life. The difference between good and excellent credit can cost (or save) you $50,000+ over a 30-year mortgage.
Credit Score Ranges and Impact
800-850: Exceptional
Rates: Best available (typically 6.0-6.5% in 2024)
Approval: Nearly guaranteed for conforming loans
Benefits: Lowest rates, highest credit limits, premium rewards cards
740-799: Very Good
Rates: Excellent rates (6.25-6.75%)
Approval: Very high approval odds
Benefits: Access to best mortgage products, great terms
670-739: Good
Rates: Good rates (6.5-7.0%)
Approval: Solid approval chances for most loans
Benefits: Qualify for most loan types with decent terms
580-669: Fair
Rates: Higher rates (7.0-8.0%)
Approval: May need larger down payment
Benefits: FHA loans are good option, some denials likely
300-579: Poor
Rates: Very high or denied
Approval: Difficult, may need co-signer
Benefits: Limited options, focus on improvement
Real Cost Example: $300,000 30-Year Mortgage
| Credit Score | Interest Rate | Monthly Payment | Total Interest Paid | Savings vs 620 |
|---|---|---|---|---|
| 760-850 | 6.5% | $1,896 | $382,633 | $55,727 |
| 700-759 | 6.7% | $1,933 | $395,939 | $42,421 |
| 660-699 | 6.9% | $1,971 | $409,614 | $28,746 |
| 620-659 | 7.3% | $2,051 | $438,360 | Baseline |
A borrower with 760+ credit saves over $55,000 in interest compared to someone with a 620 score!
How to Improve Your Credit Score
High-Impact Actions (35% of score: Payment History)
- ✅ Pay all bills on time - Set up autopay for everything
- ✅ Never miss a payment - Even one 30-day late payment can drop your score 60-100 points
- ✅ If you have late payments, get current and stay current - Time heals old wounds
- ✅ Set up payment reminders or calendar alerts
Medium-Impact Actions (30% of score: Credit Utilization)
- ✅ Keep credit card balances below 30% of limits (under 10% is ideal)
- ✅ Pay down high balances - This can improve score in 30-60 days
- ✅ Request credit limit increases (but don't increase spending)
- ✅ Don't close old credit cards - Keep them open with small occasional purchases
Lower-Impact Actions (15% of score: Length of Credit History)
- ✅ Keep oldest credit accounts open and active
- ✅ Become an authorized user on someone's old account with perfect history
- ✅ Don't close cards unless there's an annual fee you can't afford
Additional Strategies (10% New Credit, 10% Credit Mix)
- ✅ Limit new credit applications - Each hard inquiry drops score 5-10 points
- ✅ Space out applications by at least 6 months
- ✅ Have a mix of credit types (credit cards, installment loans, mortgage)
- ✅ Check your credit reports for errors and dispute inaccuracies
Credit Improvement Timeline
- 30-60 days: Pay down credit card balances below 30% utilization
- 3-6 months: Establish consistent on-time payment history
- 6-12 months: Major score improvements with perfect payment history
- 7 years: Late payments and other negative marks fall off report
- 7-10 years: Bankruptcies removed from credit report
Understanding Debt-to-Income Ratio (DTI)
Your DTI ratio compares your monthly debt payments to your gross monthly income. Lenders use this to determine if you can afford additional debt.
How to Calculate Your DTI
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Example Calculation
Monthly Debts:
- Mortgage/Rent: $1,500
- Car Loan: $350
- Student Loans: $200
- Credit Cards (minimum payments): $100
- Total: $2,150
Gross Monthly Income: $6,000
DTI Calculation: ($2,150 ÷ $6,000) × 100 = 35.8%
DTI Requirements by Loan Type
| Loan Type | Front-End DTI | Back-End DTI | Notes |
|---|---|---|---|
| Conventional | 28% | 43% | Stricter with lower credit scores |
| FHA | 31% | 43-50% | More flexible with compensating factors |
| VA | 41% | 41% | Can go higher with strong credit |
| USDA | 29% | 41% | Rural property loans |
Front-End DTI: Housing costs only (PITI: Principal, Interest, Taxes, Insurance)
Back-End DTI: All monthly debts including housing
What Counts in DTI?
✅ Included in DTI:
- Mortgage or rent payment
- Property taxes and insurance
- HOA fees
- Car loans/leases
- Student loans
- Personal loans
- Credit card minimum payments
- Child support/alimony paid
- HELOC payments
❌ NOT Included in DTI:
- Utilities (electric, gas, water)
- Cable/internet
- Cell phone bills
- Groceries
- Gas for car
- Insurance (health, auto, life)
- Gym memberships
- Subscriptions
- Entertainment expenses
How to Improve Your DTI Ratio
Reduce Monthly Debts (Faster Results)
- ✅ Pay off small debts completely to remove them from DTI
- ✅ Focus on high-payment debts (car loans, personal loans)
- ✅ Refinance high-interest debt to lower payments
- ✅ Avoid taking on new debt before applying for mortgage
- ✅ Don't buy a car until after your mortgage closes
- ✅ Pay down credit card balances
Increase Income (Takes Longer)
- ✅ Get a raise or promotion at work
- ✅ Take on a side hustle (must show 2-year history)
- ✅ Include spouse's or co-borrower's income
- ✅ Include bonus or commission income (with 2-year history)
- ✅ Include rental income from investment properties
Strategic Approaches
- ✅ Choose a less expensive home to lower housing costs
- ✅ Make a larger down payment to reduce loan amount
- ✅ Remove cosigners from debts they don't benefit from
- ✅ Wait until student loans are in repayment (not deferment/forbearance)
Using Both to Your Advantage
Credit score and DTI work together in mortgage approval. Here's how to optimize both:
6-Month Mortgage Preparation Plan
Month 1-2: Assessment & Quick Wins
- Pull all three credit reports (free at AnnualCreditReport.com)
- Dispute any errors immediately
- Pay down credit card balances below 30% of limits
- Calculate your current DTI ratio
- Create debt payoff strategy
Month 3-4: Debt Reduction & History Building
- Continue paying all bills on time
- Pay off smallest debts to remove from DTI
- Keep old credit cards open with small purchases
- Avoid new credit applications
- Save for larger down payment
Month 5-6: Final Optimization
- Check credit score progress
- Recalculate DTI
- Get pre-approved with multiple lenders
- Don't make major purchases
- Keep employment stable
Compensating Factors
If your credit or DTI isn't perfect, these factors can help offset concerns:
- Large Down Payment: 20%+ shows financial stability
- Cash Reserves: 6-12 months of payments saved
- Stable Employment: 2+ years at same job/industry
- Income Growth: Rising income trajectory
- Low LTV: Borrowing less than you qualify for
- No Late Payments: Perfect payment history for 2+ years
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