Credit Scores and Debt to Income Ratios
A very normal question that comes up in the pre-homeowner stage is often “What does my credit score need to be?” and “What should my Debt-to-income ratio be?” In fact every homeowner has faced these questions in the home-buying process. Your credit score is indeed an important factor in securing a home loan, but it’s not the only factor.
An individuals income and current debt payments are often the most heavily weighted qualifiers. Debt payments, meaning bills you pay monthly, coupled with your monthly income, build a debt-to-income picture that shows lenders how much of a mortgage payment you can afford.
If you have a perfect credit score, but more debt than income, the odds of a lender being able to offer you a loan are slim. Don’t be discouraged though, there are always different options available.
What credit score should I have?
Various lenders has different credit score requirements but generally for a conventional loan not backed by the government (like an FHA or VA government backed loans) the necessary credit score to by a house is around 660. Most lenders can secure you a loan with a decent interest rate with a score of 660 or above. The other number that is very equally important is your debt to income ratio.
What is debt-to-income? What should my DTI be?
Debt to income ratio is another very important factor in getting approved for a home loan. Lenders look at this number to determine whether or not they can provide you with a loan based on how much money you have compared to the amount of debt you have.
Arkansas Rural Development Loans, Not Just for Farmers
It’s common for people to think that the Rural Development Home Loans are only for farmers or for people who live out in the middle of nowhere. This is understandable as this program does come from the US Department of Agriculture and does include “rural” in the title… However, this is not all correct.
So what is the USDA Rural Development Home Loan?
A USDA loan is a home loan that is offered by the U.S. Department of Agriculture. It helps qualified people purchase, refinance, renovate or relocate a house. There are two types of USDA loans: direct and guaranteed. The Direct loan is provided by the USDA, while the latter comes from a third party, such a mortgage lender or bank.
- Direct: These loans are generally meant to help low-income individuals buy homes in rural areas. The maximum loan term is 33 years, or 38 years for applicants whose incomes fall below 60 percent of the area median income (AMI).
- Guaranteed: A guaranteed USDA loan is also for low-income individuals who need help buying homes in rural areas, but the loan term is only 30 years.
The Guaranteed program is for low to moderate income applicants to purchase a primary residence in a “rural” area of the state. These mortgages are processed, underwritten and serviced by your preferred lender and it has “guarantees” backed by the USDA.
To qualify for this loan type you have to meet the income guidelines set forth in the programs terms. To find out if your income is eligible use the USDA Income eligibility calculator here.
So what exactly is considered “rural” anyway?
In Arkansas, there are several counties that are eligible for the loan assistance program. Rural areas consist of communities that have 20,000 and under in population and are not a part of an urban area. As the guidelines for what is and what isn’t considered “rural” change often, it’s best to contact a professional real estate agent in Arkansas to give you the most updated list of rural properties.