How Well Do You Roll the DICE!

I have worked in real estate since 1992. Started as a Realtor© moved on to mortgages and eventually property management; including managing a portfolio of 20 properties for a large REIT out of Chicago. Now I have come full circle working again as a Realtor©.

During all those years there was a lesson that stuck with me. Whether I was qualifying someone to buy a home, get a home loan or qualifying for a rental; the end decision always was affected by the acronym DICE.

DICE stands for Debt, Income, Credit and Equity.

Let's review them one by one and see how they affect your ability to buy a home and qualify for a loan.

Debt - this is the amount of credit card, car loans, personal loans, student loans, mortgage(s) that you are responsible for at any given time. If you are maxed out on your lines of credit, it will have a negative impact on your credit score. You may have a $100,000 in credit from credit card companies but if they are all maxed out, lenders see you as a high credit risk and you would be less likely to get a loan even if you always pay on time. You should always try and keep the credit card balance to no more than 50% of your credit line. I always tell people to use your credit wisely and always pay your credit card debt in full.

Income - This is your gross monthly or yearly income. Lenders will take this number and determine what percentage goes into paying monthly debt. This is called the debt to income ratio. There are two ratios lenders look at; front end and back end.

Front end is your projected monthly mortgage payment including taxes and insurance. The back end is your projected monthly mortgage payment, including taxes and insurance, plus all consumer debt.

For example, a conventional loan may use the 33%/38% debt to income ratio; on the front end your mortgage payment including taxes and insurance should not exceed 33% of your gross monthly income and on the back end your mortgage payment including taxes and insurance plus all consumer debt should not exceed 38% of your gross monthly income.  For FHA loans this number may be higher. Also lenders may make exceptions depending on other factor such as... YOUR CREDIT SCORE!

Credit - while most lenders will tell you they do not use a credit score to qualify for a loan all of them have guidelines that affect your qualification according to your credit score. The higher your credit score the less of a credit risk you are perceived to be. Of course this is greatly affected by your debt to income ratio and the amount of your down payment in other words; your Equity!

Equity - This is the amount of money you are using as a down payment on your home. This will determine your loan to value ratio. Obviously the larger your down payment the more flexible lenders are with the other three factors affecting your loan approval. Of course there are, limits to that flexibility and is affected by your credit worthiness and your debt to income ratios. For example an FHA loan the minimum down payment is 3.5% of the purchase price. For a conventional loan this is more in line with at least 10% down.

So how well do you roll the DICE!