Buying or selling a home is one of life’s most significant financial undertakings. Yet, despite its importance, the financing aspects—specifically credit scores, debt-to-income (DTI) ratios, and mortgage rate locks—are often shrouded in misconceptions. As mortgage professionals, we’re here to demystify these crucial elements, separating myth from fact to empower you with accurate, current information. Understanding these factors isn’t just about qualifying for a loan; it’s about securing the best possible terms for your real estate journey.
Credit Score Myths & Facts: Beyond the Numbers
Your credit score is often seen as the gatekeeper to homeownership. While vital, many believe common myths that can hinder their progress.
Myth 1: Checking My Credit Score Will Significantly Hurt It
This is a common fear that often prevents people from monitoring their financial health.
- Fact: Not all credit checks are created equal. There are two main types: soft inquiries and hard inquiries. A “soft inquiry” occurs when you check your own credit, or when a lender pre-screens you for an offer. These have no impact on your credit score. A “hard inquiry” happens when you formally apply for new credit, like a mortgage or car loan. While hard inquiries can temporarily lower your score by a few points, their impact lessens over time and typically stops affecting your score after a year. FICO® Scores often group multiple mortgage inquiries within a short period (14 to 45 days) as a single inquiry to allow for rate shopping without significant harm.
Myth 2: Only My FICO Score Matters for a Mortgage
While FICO is certainly dominant, it’s not the only piece of the puzzle.
- Fact: Most mortgage lenders primarily use FICO® Scores from the three major credit bureaus (Equifax, Experian, and TransUnion). However, they often pull a tri-merge report containing scores from all three and may use the median score if you’re applying alone, or the lower median score if there are multiple borrowers. Furthermore, while the score is a crucial indicator, lenders also consider your overall credit history, payment behavior, employment history, and debt levels. Key factors influencing your FICO score for a mortgage include payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
Myth 3: I Need Perfect Credit to Buy a Home
The idea that only those with impeccable credit can achieve homeownership is simply untrue.
- Fact: While a higher credit score (generally 670 and above) can unlock better interest rates and loan terms, you absolutely do not need perfect credit to buy a home. The minimum credit score needed for most mortgages is typically around 620. Many government-backed programs, such as FHA (Federal Housing Administration) loans, are designed for borrowers with lower credit scores or smaller down payments, often accepting scores below conventional loan requirements. Lenders look at your entire financial picture, including your income, employment stability, and down payment, not just a single number.
Demystifying Debt-to-Income (DTI) Ratio
Your DTI ratio is a critical metric lenders use to assess your ability to manage monthly mortgage payments alongside your existing debts. Misunderstandings here can lead to unexpected denials.
Myth 1: My DTI is Just About My Monthly Debt Payments
Many homeowners focus solely on their credit card bills or car payments.
- Fact: DTI compares your total monthly debt payments to your gross monthly income (income before taxes). Lenders calculate two types:
- Front-end DTI (Housing Ratio): This focuses on housing-related expenses, including your projected monthly mortgage payment (principal and interest), property taxes, homeowners insurance, and any HOA dues or private mortgage insurance (PMI).
- Back-end DTI (Total Debt Ratio): This is the more comprehensive ratio and includes your total housing expenses PLUS all other monthly recurring debts, such as car loans, student loan payments, minimum credit card payments, and other personal loan obligations. When people refer to DTI, they are generally referring to back-end DTI.
Myth 2: A High Income Automatically Means a Low DTI
While a higher income helps, it’s the ratio of income to debt that truly matters.
- Fact: You could have a substantial income but also significant monthly debt obligations, resulting in a high DTI. Conversely, someone with a moderate income but very few debts could have a favorable DTI. Lenders are looking for a balanced financial picture, indicating you can comfortably afford your new mortgage payment without being overstretched.
Myth 3: There’s One Universal DTI Limit for All Mortgages
The idea of a single, rigid DTI limit is a common misconception.
- Fact: While a general rule of thumb suggests an ideal back-end DTI of 36% or less and a front-end DTI of 28% or less, these are not strict maximums. Acceptable DTI ratios vary significantly based on the loan program, lender, and other compensating factors (like a large down payment or significant reserves). For example, conventional loans typically prefer a DTI below 45-50%, while FHA loans can sometimes approve borrowers with DTI ratios as high as 50-57% under specific circumstances.
Understanding Rate Locks
Securing your interest rate is a critical step in the mortgage process, but how rate locks work often leads to misunderstandings.
Myth 1: I Can Lock My Rate Anytime and For Any Period I Want
The flexibility of a rate lock is often overestimated.
- Fact: A mortgage rate lock is an agreement with a lender to secure a specific interest rate for a defined period while your loan is being processed, typically 30, 45, or 60 days. Longer lock periods might be available but can sometimes come with a slightly higher interest rate due to increased market risk for the lender. You generally lock your rate once you’ve found a property and are moving forward with the loan application, not during initial pre-qualification.
Myth 2: A Rate Lock is Set in Stone, No Matter What
While a rate lock protects you, it’s not entirely immutable.
- Fact: A rate lock protects you if interest rates rise during the lock period. However, it can change if there are significant alterations to your application (e.g., loan amount, credit score, verified income changes) or if the lock period expires before closing. If rates drop after you’ve locked, some lenders offer a “float-down” option, often for a fee, which allows you to adjust to the new, lower rate under specific conditions.
Myth 3: Locking a Rate is Always the Best Move
The decision to lock should be strategic, not automatic.
- Fact: Locking your rate provides certainty and protection against rising rates, which is often valuable in a volatile market. However, if interest rates are trending downwards, you might consider “floating” your rate for a period, hoping to secure a lower rate closer to closing. This carries risk, as rates could also unexpectedly rise. Your decision should be based on current market trends, your risk tolerance, and the advice of your mortgage professional. Many initial rate locks are free, but extending a lock or utilizing a float-down option often incurs fees.
Your Path to Real Estate Clarity
Navigating the complexities of credit, DTI, and rate locks is a critical part of a successful real estate transaction. By understanding these key financing concepts, you can approach the process with confidence, make informed decisions, and avoid common pitfalls. Remember, accurate information is your most powerful tool.
Ready to explore your homeownership options or have more questions about securing your mortgage? Don’t let myths hold you back. Contact us today for personalized guidance and expert advice tailored to your unique real estate goals!
Rate Trac Mortgage, NMLS #2333681, Licensed in CA. For information only. Not a commitment to lend. All loans subject to credit and underwriting approval. Rates, APRs, and terms may change without notice and vary by borrower and property. Not legal, tax, or financial advice. Equal Housing Lender.