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Understanding Income, Debt, Credit Score, and Debt-to-Income

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Understanding key financial terms is essential for first-time homebuyers (and anyone else getting ready to borrow money from a lender). Knowing what these terms mean and what a lender may be looking for can help as you make financial decisions.

When you express interest in Twin Cities Habitat’s homeownership program, you will be asked about your: Income, debt, credit scores, and debt-to-income ratio. Below we'll define these terms and share resources and examples to help you find, identify, or calculate your answers.

Remember, this information pertains to our homeownership program, and may vary slightly from how other associations, lenders, and programs define or calculate these numbers.

Income

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Income is defined as "money received, especially on a regular basis, for work or through investments or assistance." Sometimes you will hear the term "gross income", which refers to your income before deductions like taxes, savings for retirement, and other deductions are made. "Net income" is your income after those deductions or expenses are calculated.

To qualify for Twin Cities Habitat's Homeownership program, we ask you about the  gross income for your household. Though, if you are self-employed, we must consider your net income.

What counts as income?

The income you report on the Get Started form (and later on your application) should include the income of any adults (18+ years old) that will be living in the home with you. This can be from full-time or part-time jobs, self-employment, and seasonal or contract work.

Any assistance received by a member of your household should be included in your total income. This includes things like Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), Social Security payments, and County Assistance. 

What DOES NOT count as income?

Do not count money received for food stamps or employment income from children under the age of 18. Payments received for care of foster children and adoption assistance are also excluded from your income calculation. 

 

Have other sources of income and wondering about how it might affect your income eligibility? Call our Programs Information Center at 612-504-5660

             

How do I find this information?

You can find your gross income on pay stubs from your employer. For income from self-employment or contract work,  your income will be reported on a 
Schedule C as part of your taxes.

How can I calculate my income?

For salaried positions, you can simply use your annual salary number. (ex: $32,000/year)

For hourly employees:

Hourly rate x hours per week x 52 weeks per year = Gross annual income 

(ex: $15.00 x 35 hours per week x 52 weeks per year = $27,300 gross annual income)

Tip: Once you have calculated your gross annual income, take that number and divide it by 12. This number is your monthly gross income. (ex: $27,300/12 months = $2,275 gross income/month) This number will come in handy in calculating your debt-to-income later.

Debt

Debt is defined as: money owed by one party, the borrower or debtor, to a second party, the lender or creditor.

How do I find this information?

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You may already know what monthly loan payments you are making. If you are not sure what loans you have, you can request a credit report to view current loan information and see your credit history. You can request a copy of your credit report by visiting annualcreditreport.comThis is a free service and trustworthy place to get that information. Here, you can request a copy of your credit report from each of the three credit bureaus. Each person may request one free report (per 12-month period) from each bureau.

These reports will list out what you have borrowed, where you borrowed from, and what you currently owe. Items like your credit cards, student loans, car loans, etc. will be accounted for in this report. Sometimes the information on your credit report is not correct, so check carefully to make sure there are no mistakes.

How do I calculate my debt?

You can use this information to calculate your total debt by adding up all outstanding debts.

(ex: Car Loan: $10,500 + Credit Card: $400 + Furniture Loan: $2,000 = $12,900 total debt)

Tip: Add up your monthly payments for each loan or account to get your total monthly debt. This number will be used in the debt-to-income section.

(ex: Car Loan: $200 + Credit Card: $25 + Furniture Loan: $105 = $330)

There are some local organizations that can assist you with pulling, reading, and understanding what your credit report says. During the tax season, if you qualify for their services, you may be able to access the Financial Services offered at Prepare + Prosper VITA tax sites.

 

 

Debt-to-income

Remember when we recommended that you calculate your monthly debt totals earlier? This is where it pays off!

How do I calculate my debt-to-income?

Take the total of your monthly debt payments and divide that number by your monthly gross income (*or monthly net income if self-employed) then, multiply by 100 to see the percentage.

(ex: $330 monthly debt/ $2,275 gross monthly income = 0.1450 x 100 = 14.5%)

Keep in mind, your monthly debt does not include things like your rent, insurance payments, or child care expenses.

Monthly Debt ÷Monthly Gross Income = Debt-to-income

If this ratio is higher than 18%, you are not currently eligible for Habitat's homeownership program. This is because your future home mortgage payment will add to your total monthly debt , and will increase your debt-to-income ratio. If your debt-to-income ratio is below 18% then you may be considered eligible, but you may still need to focus on debt reduction (paying down loans, credit cards, etc.)

Credit Score

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The definition of credit score is: a number assigned to a person that indicates to lenders their capacity to repay a loan. You receive a credit score from each of the three credit bureaus which are based on some of the following factors: 

  • payment history
  • outstanding balances (amount owed)
  • length of your credit history
  • applications for new credit accounts (inquiries)
  • the diversity of credit accounts (mortgages, car loans, credit cards)


How do I find this information?

There are many ways to get your credit score. Your credit scores are not included in credit reports requested through annualcreditreport.com. 

It is important to know that your credit scores are reported differently from the three credit bureaus. Because of this, Habitat will use the median score reported from the three credit bureaus (Equifax, Experian, and TransUnion). That number must be higher than 580 for each applicant to be considered program eligible.


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Becky Engen

Becky Engen

Becky Engen has a passion for writing and building and engaging with communities through social media. She graduated from St. Cloud State University, and began her career in marketing and advertising as a junior copywriter and social media specialist. Becky joined the Twin Cities Habitat marketing team in 2013 as the Digital Marketing Program Manager and loves that she continues to learn something new each and every day about the great people who work for, volunteer with, and are served through the organization.

Topics: Homebuyer Tips, Homeownership Program

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