Credit, debt-to-income, and savings

Credit scores: what lenders see

Your credit score is a lender's shorthand for how you've handled debt. It affects two things: whether you qualify for a given loan program and what it costs, meaning your interest rate and, on conventional loans, your mortgage insurance premium.

Each program sets its own minimums, and individual lenders can set stricter ones (called "overlays"). For example, MHP's ONE Mortgage currently lists a 640 minimum for a single-family home or condo and 660 for a two- or three-family. MHP also has options for buyers with no traditional credit history. Other programs have different thresholds, so ask your lender which apply to you.

What moves your score

• Payment history. Late payments do the most damage. Set up autopay for at least the minimum on every account.
• Credit card balances. Keeping balances low compared to your limits helps. Paying cards down before the statement closing date can raise your score quickly.
• Age of accounts. Don't close your oldest card just before applying.
• New credit. Don't open new cards, finance a car, or buy furniture on credit between pre-approval and closing. Lenders often check your credit again right before closing.
• Errors. Pull your credit reports and dispute anything that's wrong. Fixing errors can take a while, so start early.

Debt-to-income (DTI)

DTI compares your monthly debt payments with your gross (pre-tax) monthly income. Lenders look at two versions:

• Housing ratio (front-end): your projected housing payment (PITI plus any HOA dues and mortgage insurance) divided by gross monthly income.
• Total ratio (back-end): the housing payment plus car loans, student loans, minimum credit card payments, and other debts on your credit report, divided by gross monthly income.

Maximum DTIs depend on the loan program, the automated underwriting system's decision, and your overall file. I'm not going to give you a single "magic number." Ask your loan officer what your file supports. One Cape-specific point: a high tax bill, a condo fee, or required flood insurance all go into the housing payment, so the same price can produce very different DTIs in different towns or flood zones.

Ways to improve DTI

• Pay off a small installment loan completely. Ask your lender first, because sometimes a loan with only a few payments left isn't counted.
• Pay down credit cards to lower the minimum payments.
• Add a co-borrower's income, if that makes sense for your household.
• Look at towns with lower tax rates or at homes outside the flood zone.
• For hourly, self-employed, or seasonal workers, which is common on the Cape: lenders generally want to see a stable history of that income. Keep your tax returns and pay records organized.

The three buckets of cash

First-time buyers often save for the down payment and forget the other two buckets.

Don't forget the costs that come before closing: the home inspection, any extra septic, well, radon, or lead testing, the appraisal (often paid up front), and your deposits with the offer and the Purchase and Sale Agreement. These come out of your pocket early. Lesson 7 covers inspections.

Where the money can come from

• Your own savings. Lenders usually want to see two or more months of bank statements. Large deposits that aren't payroll will need an explanation and a paper trail, so don't move cash around without records.
• Gifts from family. Many programs allow gift funds with a signed gift letter. Rules about who can give and how much vary by loan type. Ask your lender before the money moves.
• Down payment assistance. MassHousing offers down payment assistance to income-eligible first-time buyers when it's paired with a MassHousing mortgage. There are other options too. Lesson 4 covers them all.
• Retirement accounts. Some buyers borrow from or withdraw from a 401(k) or IRA. This has tax consequences, so talk to your tax professional first.

A 6–12 month prep plan

1. Month 1: Get the facts

   Pull your credit reports, list every debt and its minimum payment, and estimate your "Cape monthly" cost from Lesson 1.

2. Months 1–2: Talk to a lender early

   A good loan officer will tell you what's holding your file back and what fixes it. A pre-qualification conversation doesn't commit you to anything.

3. Months 2–6: Fix and save

   Dispute errors, pay down cards, set up autopay, and send a set amount to a separate down payment account every payday.

4. Anytime: Take a homebuyer class

   Many programs require one, and the certificate is usually good for a while. Housing Assistance's first-time homebuyer course and the Community Development Partnership's homebuyer education both serve the Cape.

5. When ready: Get fully pre-approved

   Then start touring. Lesson 3 explains pre-approval.

Lesson checklist

• I've pulled my credit reports and disputed any errors.
• I've listed all my debts and their minimum payments.
• I have a savings target for each of the three buckets.
• I've asked anyone giving me gift money to wait until my lender explains the rules.
• I've signed up for (or finished) a homebuyer education class.