In last month’s article, we asked, Should I own? This week, we ask, Can I own? This one can be a little trickier to answer.

Whether or not a person is able to secure a mortgage depends on a few major factors: credit score, down payment, and debt-to-income ratio. Other factors will come into play, such as the property itself, liquid assets, and work history. But let’s focus on the three major components for now.

Credit Score

These are perhaps the two most feared words in home buying. A strong credit score can help you tremendously in securing a mortgage. However, there are numerous options available to you as a home buyer if your credit rating is not so great or, for lack of a better term, bad.

To help understand FICO (Credit) Scores, let’s look at some information from the myfico.com web site. This is for informational purposes only and should not be construed as credit counseling.

The calculation is based on five categories and their percentages:

1) Thirty-five percent of your score is based on payment history. Do you pay your bills on time or late? If late, how late?

2) Thirty percent of your score is based on how much you owe, relative to your credit limit on each of your credit lines (i.e. credit card limits).

3) Fifteen percent of your score is based on length of credit history.

4) Ten percent of your score is based on types of credit used (i.e., credit cards, auto loans, etc).

5) Ten percent is based on any new credit you may have opened recently.

So what can we take from this information? Plenty. Here are a couple of good tips to keep in mind, whether your credit is immaculate or in need of some clean-up.

Try to keep your credit balances under 30 percent of each credit limit to improve scores. Timely payments are not the only score driver. This point is often overlooked, and is an integral component of your credit rating.

Don’t close your accounts. When people are trying to get their finances in order, they will often close out as many of their credit lines as possible. However, in closing these lines of credit, you are badly hurting your rating. The better idea is to keep those accounts open, with a zero balance, and if you have to cut the cards in half so you don’t use them, so be it.

There are numerous programs available if you have a below average credit score. Those programs sometimes come with a higher interest rate, though you may be able to overcome that rate hike with a solid down payment. Also, there are Federal Housing Authority (FHA) loan programs that often allow people with average to below average credit to secure a good rate.

If you have a less-than-perfect credit score, here are some good suggestions to clean it up.

First and foremost, keep all credit and utility payments “clean” (i.e. on time) for at least 12 months.

If you have any creditors, contact them and arrange for a settlement program that you can handle. If you are in this type of situation, another good idea is to keep records of all rent and utility payments; you are creating alternate lines of credit that can be used to help secure a mortgage.

There is a great article on credit repair at http://www.ftc.gov/bcp/conline/pubs/credit/repair.htm, if you would like more information.

Down Payment

I take back what I said earlier: These are the two most feared words in home buying. People often hold off on buying a home because they want to wait until they have enough money saved up to make a large down payment. In the meantime, they are wasting hundreds, if not thousands, of dollars each month on those rent payments, and further depleting their finances.

Most artists (myself included) are not able to put down 20 percent on a property. Fortunately, there are plenty of other options. There are a myriad of 100 percent financing programs available, there are government programs designed for first-time home buyers with little money for a down payment, and it may be possible to negotiate an offer for a home that requires the owner to pay some or all of your settlement expenses, thereby lowering your up-front costs. I hope to spend more time on these types of solutions in future articles.

Debt-to-Income Ratio

Debt-to-income ratio (DTI) is exactly what its name suggests—the amount of money you owe each month divided by the amount of money you earn. In general, lenders want your DTI to be no higher than 38 percent; therefore, your DTI is critical in determining your borrowing potential. For example, let’s say you make $36,000 annually, or $3,000 per month. You might have a $200 a month car payment and $50 a month in minimum credit card payments. The maximum amount of debt payments you can have in a month is $1,140 (38 percent of your $3,000 monthly income), so if we subtract the $250 of current debt from the $1,140 of potential debt, we find that you have $890 that can go toward your home payment. Your home payment includes your mortgage, real estate taxes, assessments (if you’re buying a condo), and insurance.

Fear not: there are several possible solutions if your DTI is a bit high. Lenders have much more flexibility with your DTI if you have a great credit score, a sizable down payment, or both. Beyond that, FHA loans have a higher DTI threshold—up to 41 percent. And finally, when all else fails, you can have a co-signer, such as your parents or other family member that wants you to stop burning that rent money, to help lower your overall debt-to-income ratio. (For the record, I had to find a co-signer when I bought my place—it’s not so bad.) One important thing to remember, though, is that any late or missed mortgage payments will affect your co-signer’s credit score as well, so it’s even more important to make prompt payments.

There you have it. Your credit score, down payment, and debt-to-income ratio are the key ingredients when answering the question, Can I own? However, there are plenty of solutions available if you are lacking in one or more of these areas. I have really only scratched the surface on these possible solutions. Hopefully, this article gives you a good general idea of what’s out there for you.

Next month, it’s the question you’ve all been waiting for: How do I own? In the meantime, if you have any questions, even if you already are a homeowner, feel free to call or e-mail me anytime. Also, please send me any comments or suggestions about this article, and let me know if there are topics that you would like to see discussed.

Mike McNamara has been a working actor in Chicago for the past six years, in theatre, commercials, television and film. Mike is also a Mortgage Consultant and Loan Originator with West America Mortgage Company. He can be reached anytime at 773/398-0021 or McNamara310@aol.com. Special thanks to Jim Morley, assistant vice -president of West America Mortgage Company (and Chicago theatre actor) for contributing to this article.

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