Applying for a mortgage, especially for the first time, is a stressful and onerous process. Unfortunately, it's also become more difficult to qualify, since many easy-money loans defaulted since the peak of the real estate market in 2006. If you're participating in a debt management plan, getting a home loan won't be easy. However, it's not impossible, and completing your own prequalification process may save you time and anxiety.
Principal, interest, taxes and insurance, known in the mortgage industry as PITI, are the four components of your total housing payment. Your down payment, your credit history and the price of the home affect this number.
Using mostly your credit history and score as a guide, you'll be quoted an interest rate that reflects the lender's assessment of risk you offer as a borrower. Participation in a debt management plan may lower your score. However, if you are about to complete it, the effect on your credit history will be less than someone who recently (say, in the past year) enrolled.
Lenders like to see PITI be less than 28 percent of your gross monthly income. Your other debts, such as your DMP, along with other loans (student or auto loans, for example), are considered as well; the total of PITI plus your other debts should not exceed 36 percent of your gross income.
Factors Affecting PITI
If you're currently participating in a DMP but have a "good" credit score (a good score begins at 680, according to FICO), you may qualify for a loan, but at a higher rate. The lower your credit score is, the higher your interest rate will be; this affects PITI, because higher interest means less of your allowable payment can be applied toward principal (your total home loan).
Of course, your mortgage balance makes up the biggest part of PITI. Your property taxes and insurance, which must be paid in full every year, make up a sizeable chunk as well. You may be able to afford a more expensive home if the property taxes are low (and vice versa).
Using an online mortgage calculator in advance can provide some clues as to how much house you can afford.
DMPs and Your Credit
Although debt counselors do not report DMP enrollment to the credit bureaus, your creditors probably do. Under DMP rules, enrolled accounts are marked "current," which helps; however, prior delinquencies don't. In fact, one-third of your credit score is calculated using your history of on-time payments.
When it comes to your credit history, time heals all wounds. Because your score is merely a current snapshot of your level of risk, many years of on-time DMP payments will allow your score to rise. If you've been making timely payments on other debts that aren't included, that helps, too.
Improving Your Credit Before Applying
If you want the best possible interest rate, have a large down payment ready and very little debt. Waiting until you've completed your DMP payments may help. It will also allow you time to save more money and review your credit history.
You can order a free copy of each bureau's credit report once a year at AnnualCreditReport.com. Review it carefully, and report any inaccuracies. For example, each account that's enrolled in the DMP should be listed as "closed by consumer request."
Pay your bills on time and in full. Don't allow your unsecured credit balances to creep past 50 percent of your available credit. Also, don't apply for too much new credit at one time.
Finally, your best chance at a mortgage may be an FHA loan. These loans permit smaller down payments and less-than-perfect credit. Speaking with a mortgage broker frankly about your past credit problems and your personal financial history will give you the best insights.
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