When you apply for a mortgage, lenders look extensively at the past and current state of your finances. They review your debts and income to calculate a ratio of the two that is one factor in determining whether you qualify for a mortgage.

Expressed as a percentage, your debt-to-income, or DTI, ratio is your all your monthly debt payments divided by your gross monthly income. It helps lenders determine whether you can truly afford to buy a home, and if you’re in a good financial position to take on a mortgage.

How to calculate DTI ratio

Understanding how your DTI ratio is calculated seems simple, but there is an additional layer of complexity since there are two types of DTI: front-end and back-end ratios.

Front-end DTI

Your front-end ratio reveals how much of your pretax income would go toward a mortgage payment, as well as housing expenses, such as property taxes and homeowners insurance. Lenders tend to prefer that your front-end DTI ratio does not exceed 28%. If your DTI is higher than that, it could be a sign that you’ll have trouble making ends meet.

Back-end DTI

To help determine if you can afford a mortgage loan, a lender may calculate your back-end DTI ratio, which shows how all of your debts — including your existing debts with a mortgage payment added in — compared to your pretax income. If the number is too high, it could indicate that you may not have enough income to pay both your debts and day-to-day expenses. 

Your back-end ratio — which is typically the default term when discussing DTI — is calculated by dividing your total monthly debt payments by your gross monthly income. Your gross income is all of the money you’ve earned before taxes, including paychecks and any investments, or other deductions such as health insurance or retirement plan contributions. Back-end DTI may not include non-debt expenses like utilities, insurance or food.

Calculating back-end DTI ratio: Some examples

What’s a good debt-to-income ratio?

The lower your back-end DTI ratio, the more attractive you may be as a borrower to lenders. Most lenders look for a DTI that’s 43% or less.

That’s because homebuyers with higher DTI ratios — meaning those with more debt in relation to their income — are generally considered more likely to have trouble making their mortgage payments.

If your DTI ratio is 50% or higher, your borrowing options may be limited, since at least half of your income is already going to debt, according to Wells Fargo. Increasing your debt may make it difficult for you to meet your obligations and prepare for unexpected costs.

How to lower your DTI ratio

There are two key ways to lower your DTI ratio: reducing your debt and increasing your income.

Here are some tips for decreasing your DTI ratio.

• Ask for a raise at work to boost your income
• Take on a part-time job or freelance work on the side
• Make extra payments to your credit card to lower the balance
• Reduce your day-to-day expenses so you can make a bigger dent in your debts, such as your student loan or auto loan balances
• Avoid making large purchases on credit that aren’t absolutely necessary
• Avoid taking out any new loans or lines of credit

Bottom line

If your DTI ratio is too high, you may not qualify for a mortgage loan with many lenders. But if you’re willing to lower your debt load or find a way to increase your income, you can lower your DTI ratio and be in a better position to get approved for a mortgage.

Installing solar technology in your home can help the environment, decrease energy costs and increase the value of your home, but switching to a renewable-energy system isn’t cheap.

Installing a residential solar-energy system can cost tens of thousands of dollars, depending on its size, according to the Clean Energy States Alliance. While the cost of solar panels and solar-energy technology has been decreasing steadily over the years, not everyone can afford to pay the cost of solar upfront.

But if you want to install a solar home-energy system, financing options such as a solar loan may be able to help.

• Solar-energy systems financing options
• Types of solar loans
• Should I get a solar loan?

Solar-energy systems financing options

If you can’t afford to pay for the technology upfront, you may have a few options for solar financing: solar leases, power purchase agreements and solar loans.

Solar leases

With a solar lease, a business installs a solar-energy system on your property, but it still owns the system. You use the energy generated, and you pay the business a set amount on a regular schedule. Depending on the lease, the company might cover equipment and maintenance, or those costs could be on you. Make sure you read the lease agreement’s fine print to find out how much the solar lease will cost you.

Power purchase agreements

Similar to a lease, with a power purchase agreement, or PPA, a solar company installs, owns and maintains your system. You agree to purchase the power it generates at a set price per kilowatt-hour that’s typically competitive with the local electricity rate.

Since you don’t own the system — for both PPAs and solar leases — you aren’t eligible for any of the residential energy tax credits that can come with installing solar.

Solar loans

A solar loan is what it sounds like: a loan that allows you to purchase a solar-energy system and pay it off over time. Unlike with solar leasing or a PPA, you own the system outright, which can allow you to take advantage of tax incentives.

Monthly payments on a solar loan are often smaller than a typical energy bill, according to the U.S. Solar Energy Technologies Office (though making a larger monthly payment and shortening the term of the loan may save more in the long run). And you may even be able to get a subsidized solar loan with a below-market interest rate.

Let’s take a closer look at the types of solar loans that may be available to you.

Types of solar loans

Solar loans come in many forms, with features you might not find with a typical personal loan. Here are some of the solar loan varieties you’re likely to come across.

Home equity loan or line of credit

A home equity loan or line of credit, both of which are forms of home improvement loans, allows you to borrow against your home’s equity.

If approved, a home equity loan gives you a lump sum that you repay in equal installments over a set time period, while a home equity line of credit gives you revolving credit that you can borrow against (up to your limit) and reuse as you pay it back (like a credit card).

While neither is specifically designed to help you finance a solar-energy system, you can use home equity funds to purchase solar technology for your home. But you should only use these types of financing if you’re certain you can repay it — because if you can’t, there’s the potential you could lose your home altogether.

Unsecured personal loans

Banks, credit unions and online lenders offer personal loans that can be used for any purpose, including installing a solar-energy system in your home. While these loans may not be specifically for financing solar, if you have good credit or collateral, you may be able to get a personal loan at a favorable interest rate and repayment terms.

Some lenders even offer unsecured personal loans specifically marketed to pay for solar technology. These loans are typically fixed-rate and paid in equal installments over a set time period. As with other types of unsecured loans, lenders may offer higher interest rates for unsecured solar loans, since they consider unsecured loans to come with higher risks for the lender.

Secured solar loans

Some solar-installation companies offer loans that allow you to apply for financing directly through them. The loan is secured by the solar-energy system itself — in other words, if you don’t repay the company as promised, the lender can repossess it. Before you apply for financing from a solar-installation company though, compare loan terms, rates and costs with other loan options.

Loans from utilities or cities

In some states, certain participating utility companies actually offer on-bill financing programs. This means you can repay your solar bill via payments that go right on your regular electric bill. Additionally, some cities and other jurisdictions offer low-interest loans, rebates and other incentives for installing solar systems. To see what’s available in your area, view the Database of State Incentives for Renewables & Efficiency.

R-PACE solar loans

Residential Property Assessed Clean Energy loans, which are funded as a result of government programs partnering with private lenders, may be another option to help you finance your home with energy upgrades like solar-energy systems. But with this type of loan, you pay the cost off over a set number of years as an assessment on your home’s property taxes — in other words, you get a higher tax bill. Take note though: These loans aren’t available everywhere.

Fannie Mae HomeStyle Energy

If you’re buying or refinancing an older or energy-inefficient home, the Fannie Mae HomeStyle Energy mortgage lets you finance energy-related improvements as part of the mortgage. It allows you to fund clean-energy upgrades, like installing solar energy, at up to 15% of the home’s appraised value. This can eliminate the need to get a separate solar loan.

Should I get a solar loan?

Like any financial decision, there are pros and cons to taking out a solar loan.

A solar loan could make sense if …

• You want to own the system but can’t afford to pay upfront
• You want a tax break for installing a solar-energy system
• You don’t mind paying for maintenance and repairs yourself

Before you go for a solar loan though, make sure to research all available options and get quotes so that you can compare interest rates and fees. And keep in mind that it’s a debt that has to be repaid and that applying for a loan may lower your credit scores.

Once you get your loan quotes, look at the estimates and make sure you can adjust your budget to make all of the loan repayments on time.

Bottom line

While paying cash for purchases may be ideal, the high cost of solar technology makes that impossible for many homeowners. Solar leasing may be an option, but if you want to eventually own your solar-energy system and benefit from the many tax credits and incentives available, a solar loan could be the best way to help you go green.

Buying a home is a big investment: You’ll have to factor in costs such as your down payment and closing costs as well as monthly mortgage payments, home insurance, property taxes and ongoing maintenance.

While the cost of buying a home varies depending on where you live, the median price for a new home was $408,100 in the fourth quarter of 2021, according to the Federal Reserve Bank of St. Louis.

As the map below shows, median new home prices vary depending on where you’re looking to live, with homes costing more in the Northeast and West.

Image: dj_housecost_update-0322

If you’re thinking of buying a home for the first time, you’re probably wondering, “What does it cost to buy a house?” Read on for an overview of common costs and the questions you should ask yourself before you decide to buy.

• What are the upfront costs of buying a home?
• What are recurring costs of home ownership?
• Next steps: Getting your finances ready to buy a home

What are the upfront costs of buying a home?

When you buy a house, there are a few big upfront costs you only have to pay once.

Down payment

A down payment is probably the main upfront cost you’ll consider when buying a home. That’s because unless you’re getting a USDA loan or VA loan backed by the U.S. Department of Veterans Affairs or U.S. Department of Agriculture, you’ll probably need to put money down on the home.

While there are benefits to putting down at least the standard of 20% of the home’s purchase price — one of them often being a lower interest rate — some lenders now offer conventional loans for as little as 3% down, and Federal Housing Administration, or FHA loans, allow as little as 3.5% down.

You may also need to make an “earnest money deposit,” which is a deposit of funds that shows the seller, as well as any real estate agent and potential mortgage lender, that you intend to go through with the home purchase.

Closing costs

Closing costs are fees you have to pay when you close on your mortgage. They’re based on the individual purchase but can vary from 2% to 7% of the purchase price of the home. They’re often split between the buyer and seller.

According to Realtor.com, buyers typically pay 3% to 4% in closing costs and sellers typically pay 1% to 3% (you can try to negotiate who pays which closing costs). With some closing costs, you have to use a certain service provider, but with others, you’re allowed to shop around for a better price.

Here are some common closing costs.

• Title insurance
• Prepaid property tax and prorated property tax
• Homeowners insurance
• Home inspection fee
• Appraisal fee
• Loan origination fee

What are recurring costs of home ownership?

Your monthly mortgage payment is likely to be your biggest recurring cost as a homeowner, but the amount of your mortgage can vary drastically depending on where you live. Check out the table below to see the top 10 states where Credit Karma members had the highest average mortgage debt as of March 2022, based on their TransUnion® credit reports.

In addition to a monthly mortgage payment, there are a number of other ongoing costs. Here are a few you may not know about.

• Homeowners insurance and property taxes — You’ll typically have to prepay homeowners insurance and property taxes at closing, and you should pay them on an ongoing basis as long as you own the home. The cost varies depending on your home and location. If you have an escrow account set up, these charges are rolled up into your monthly mortgage payment. But if you don’t have an escrow account, you’re in charge of paying them on your own, and you may have the choice of paying them monthly or annually.
• Mortgage insurance — If you take out a conventional loan and put down less than 20%, it’s possible you’ll have to pay private mortgage insurance, which protects the lender financially. You can typically request for PMI to be canceled once you reach 20% equity in your home. If you take out an FHA loan, you have to pay mortgage insurance, though you may be able to cancel your insurance once you pay down enough of your loan.
• Homeowners association fees — Some planned neighborhoods or condo buildings charge ongoing fees to cover maintenance and repairs of common spaces. According to Realtor.com, HOA fees can cost $200 to $300 a month for a single-family home, though it can vary greatly depending on amenities and home size.
• Maintenance — Depending on the age and condition of the home, you’ll face ongoing repairs and maintenance costs. A 2017 analysis by Zillow found that landscaping, cleaning and maintenance alone can add more than $3,000 per year to the cost of homeownership.

Next steps: Getting your finances ready to buy a home

If you think you’re ready to buy a house, a good next step is reviewing your finances to make sure they’re in order. You’ll also want to calculate how much home you can afford.

Taking a peek at your credit scores and credit reports and calculating your debt-to-income ratio will give you a good indication of where your finances stand.

And if you think buying a home is in your near future, consider applying for prequalification or preapproval. That can also help give you an indication of how much house you may be able to afford. Shopping around and comparing several potential rates is always a good idea when possible.

As a homeowner, monthly spending begins with your mortgage payment: It’s typically your biggest expense and considered by many to be the most important payment — after all, you don’t want to lose the roof over your head, which could happen if you don’t keep up with your mortgage. If you learn how to budget, you’ll be on your way to ensuring you can afford all of the expenses of homeownership and your other bills, plus have a little left over for fun.

The mortgage isn’t the only bill you’ll see as a homeowner. You’ll also face property taxes, homeowners insurance and possibly homeowners association fees. And if your water heater or air conditioner gives out, you’re on the hook for the repair costs.

But here’s the good news: The extra pressure and expenses of homeownership aren’t anything to be afraid of if you’re prepared. If you take the time to learn how to budget as a new homeowner, it will help you monitor your expenses and help ensure your mortgage payment is never late.

The merits of a budget

If you’ve never budgeted — or if you’ve tried and failed — it may sound intimidating. But in its purest form, budgeting simply helps you track money coming in and money going out.

While the thought of watching your every dollar may sound stressful and restrictive, in practice, it can actually turn out to be the opposite. Knowing where your money is going and how much you can afford to spend in each category can reduce stress and give you more freedom.

Here’s why: You no longer have to white-knuckle it to the end of the month. If you create a budget and stick to it, you’ll know exactly how much money you have left over for fun after paying your nonnegotiable expenses. Doesn’t that sound better than avoiding looking at your bank statement and just hoping for the best?

How to budget as a new homeowner

A budget consists of two key factors: income and expenses. To get started, grab some paper and pen, or a create a spreadsheet on your computer. (You can also use this handy budget worksheet offered by the Consumer Financial Protection Bureau.) Start with your income: Enter all of the money that flows in each month, including from work, spousal or child support, investments and any other sources.

Next, list out your expenses. Start with your monthly mortgage payment and any other home-related costs, like homeowners association fees, insurance and taxes. You should also add in some funds for ongoing repairs — according to Realtor.com, homeowners should be budgeting about 1% of the home’s price tag annually for repairs and emergencies.

Now list any other required bills or expenses, like auto insurance, car payments, debt payments, utilities, groceries, childcare, etc. It’s OK if you have to estimate for bills that fluctuate. Total all your expenses — that tells you how much take-home pay you need every month to simply make ends meet.

Then, add in all your current expenses that you pay each month but don’t absolutely need. Think Netflix, Spotify, gym memberships, and household services like lawncare or housekeeping.

Take your new expense total and subtract it from your total household income. If you have anything left, congrats — that’s what you have left for savings and fun. As a homeowner, it’s prudent to put some leftover funds in an emergency fund for those unexpected repairs we mentioned earlier.

If your totaled expenses exceed your income, you aren’t bringing enough in to make ends meet, and that means you need to cut expenses or earn more income.

Another way to tell if your finances are in good shape: There’s a popular rule of thumb called the 50/30/20 rule, which states that 50% of your income should be spent on needs, 30% on wants, and 20% on savings and debt payments. You don’t have to follow this exactly, but it can be a helpful guide.

Cutting costs

If the amount you have left is too little for comfort, or there’s nothing left at the end of the month, it’s time to figure out where to cut costs.

Look at your bank statements from the past few months and highlight the items that weren’t truly necessary. Did you impulsively hit “Buy Now” on Amazon a few too many times? Did you order food delivery when you could have made a few meals from groceries for the same amount? Did you spend more than you really needed on rideshares?

Take a close, hard look at these types of expenses and ask yourself if you can cut some of them out or reduce them. If you’re living really close to the bone and you’re contributing to a retirement account each month, you may even want to consider putting that on hold (temporarily!) until your finances are more stable.

If it feels painful, keep in mind that these bigger cuts don’t necessarily have to be forever. Perhaps at some point you’ll get a raise or pick up a side job, or maybe some of your expenses will drop off (like when a child in daycare starts school or a debt is paid off).

Setting up an ongoing budget

Using the information you just put together, you can create an ongoing budget. There are numerous methods for this; you can put together an estimated budget in a spreadsheet and manually add your spending to make sure you’re on track. There are also digital tools, like Mint, that do a lot of the work for you. They allow you to designate spending categories and their limits, and then automatically track your progress once you link your accounts. Alternatively, some budgeters might prefer to physically put cash aside in envelopes for each spending category, which helps prevent overspending.

Here’s a fun part of budgeting: If you have money left over after your expenses are paid, you get to decide how you want to divvy it up each month. You can just wing it — but it’s wise to have a plan so you don’t just fritter it away.

Will you put a set amount into a savings account each month to be used for future home repairs? Will you contribute some of it to retirement? Do you want to use a portion of it for vacations or clothes shopping? It’s up to you.

At the beginning of each month, it’s smart to sit down and look at your budget, and then make any adjustments for the coming month. If you budget with a partner, do this together.

Think of any out-of-the-ordinary income or expenses ahead. Perhaps a work bonus is coming in. Maybe you have a wedding to attend that month and you want to plan for a wedding gift and a hotel room.

Whatever your extra expenses might be, you’ll need to find a place in your budget where you can offset any amount outside of your normal spending. This ensures you won’t have to rely on credit cards or other borrowing to get you through the month. Maybe that means setting aside less savings that month, or having less money for dining out or shopping. Look at it like a puzzle: Every month you start with a template and move the pieces around depending on what’s happening.

Bottom line

Budgeting isn’t fun, but as a homeowner with a fresh new batch of expenses, it’s a smart move. Tracking your spending can help you plan for emergencies and have the peace of mind that you can afford your lifestyle.

Buying a home is one of life’s biggest milestones for countless Americans, and the largest purchase many will ever make.

For most mortgages, you’ll have to put at least some money down, and that’s not the only thing you should save for: There are also closing costs, property taxes, and ongoing repairs and maintenance. That’s a lot to take on, and it makes sense to take a few years to save up before you can buy a home. That may seem like a long time, but don’t worry — there are a few ways to speed it up.

And while it’s tricky to amass thousands of dollars for a down payment when you’re already stretched to the max with expenses like rent, utilities, student and/or auto loans, transportation and possibly childcare, it is possible.

If you’re hoping to be a homeowner in the future, here are our best tips for how to save for a house.

1. Determine how much you need

You need a 20% down payment to buy a house, right? Not necessarily — many banks now offer conventional mortgage loans with down payments as low as 3%. There are also government-backed mortgages like FHA loans, which allow down payments starting at 3.5%, and VA loans and USDA loans, which may require no down payment at all. Depending on the loan, you may have to pay for mortgage insurance, but you may decide this is a worthwhile trade-off if it gets you into a home sooner. Meet with a mortgage loan officer to determine what types of loans you could qualify for, how much house you can afford and how much of a down payment you’d need. That will inform how much you need to save, and who knows — it may be a lot less than you think!

2. Get your debt under control

Carrying a lot of debt makes it more difficult to save for a house, since a chunk of your income goes toward repayments. That debt load can also make it more difficult to qualify for a mortgage. If you have debt, do whatever you can to reduce it. If you have student loans with high interest rates, consider refinancing them to lower your payments. If you have high-interest credit card debt, pay off as much as you can and consider transferring your balance to a low-interest card.

3. Put retirement savings on temporary hold

Caveat: This might not be advisable if you’re close to retirement. But if you’re young and actively contribute a percentage of your income to a retirement plan, like a 401(k) or IRA, consider temporarily diverting that money to down payment savings. This should only be short term, but it can make a big difference in how quickly you can save for a house, especially if you currently put a sizeable chunk of every paycheck into a retirement account.

4. Use technology to make saving less painful

Cutting back and setting aside money is obviously important if you want to save up for a house, but taking a portion out of each paycheck can feel like it’s cramping your style. If that’s the case, try an app like Digit, which uses technology to automatically save a daily amount small enough that you won’t notice it or hurt your budget. There’s also Acorns, which rounds up your purchases to the nearest dollar and puts the difference in an investment account. Your spare change can add up quickly over time, and you can also make one-off deposits whenever you’re able to.

5. Ask for gift money

When your family asks what you want for your birthday, Christmas or Hanukkah, anniversary or any other special occasion, tell them you’d love to forgo tangible items and instead receive gift money that you can put toward a house down payment. While not everyone may oblige, some of your relatives may enjoy knowing they’re helping you attain your dream of homeownership.

6. Get a side gig

With the gig economy continuing to expand, there are ways to make a quick buck to help boost your down payment savings. Consider spending a few hours a week driving for a rideshare service, shopping or delivering meals for an online delivery service, walking dogs, pet sitting, charging self-service scooters … you get the idea. Thanks to technology, there is an ever-increasing number of freelance opportunities like these that require very few qualifications and make it easy to earn extra cash you can put away for a home.

Prepayment penalties are exactly what they sound like — fees for paying off all or some of your loan early.

In the world of personal finance, paying off a debt before you’d planned is usually a cause for celebration.

But when you pay off your loan sooner than expected, your lender doesn’t earn as much interest. By listing a prepayment penalty on the loan, your lender can either try to discourage you from paying off the loan early (resulting in full interest payments) or make up for “lost” interest by charging you the fee.

Keep in mind that these fees only affect you if you pay off your loan early — they won’t affect you if you pay off the loan as scheduled in your contract. But it’s always a good idea to know if the loan you’re signing up for charges a prepayment penalty — even if you don’t plan to pay the loan off early. Knowing the terms of your loan can help you make financial decisions in the future.

We’ll discuss where you might run into prepayment penalties, how to avoid them and what to do if you already have one in your contract.

• Are prepayment penalties always legal?
• Loans that might have prepayment penalties
• Types of prepayment penalties
• How to avoid prepayment penalties
• How to deal with prepayment penalties on an existing loan
• FAQs about prepayment penalties

Are prepayment penalties always legal?

If you think prepayment penalties sound like trouble, you’re not alone. In fact, the Consumer Financial Protection Bureau deemed them a risky loan feature. In 2014, the agency implemented rules to restrict how much lenders can charge in prepayment penalties on certain mortgages.

Some states go so far as to ban prepayment penalties on all types of loans. But some banks are regulated by federal law, not state law, so it’s important to do your research and talk to your lender so you know which policies apply to your loan.

Loans that might have prepayment penalties

You may come across prepayment penalties in a number of different types of loans.

Mortgages

If you do see a prepayment penalty, it’s most likely on a mortgage loan. While it has become less common since the 2008 housing crisis, some mortgage loans still come with these fees, which can add up to thousands of dollars. Not all mortgages have them, but if yours does, you likely agreed to it in your closing documents.

Typically, you won’t be charged a prepayment penalty when you put small chunks of extra money toward your loan principal. But if you pay off a large part of your balance at once, or pay off the entire balance within the first few years (even if it’s due to selling or refinancing your home), you may owe the lender a prepayment penalty.

The actual cost of a prepayment penalty varies by lender. The fees can either be calculated as a percentage of the principal balance remaining on your mortgage, or as a lump sum. Some states also have laws that place additional time and financial limits on these fees.

Other loans

Prepayment penalties are less common on other types of loans, but it’s possible you’ll encounter them at some point. For instance, certain auto loans come with a prepayment penalty clause.

Some personal loans may have these fees as well, though many personal loan lenders specifically advertise that they don’t have these fees. You might also come across a prepayment penalty on a home equity line of credit, or HELOC.

Take note: Lenders are not allowed to charge you a prepayment penalty if you pay your student loans off early. Additionally, federal credit unions aren’t allowed to charge prepayment penalties on any loans (although state-chartered credit unions can charge them on certain loans, provided the state allows it).

Types of prepayment penalties

There are two types of prepayment penalties for home loans — one can be more forgiving than the other. Be sure to talk with your lender about which type of prepayment penalty they may use

Soft prepayment penalty

With a soft prepayment penalty, you’re able to sell your home without having to pay a penalty. But if you’re planning on refinancing with a soft prepayment penalty, you’ll have to pay a prepayment penalty.

Hard prepayment penalty

A hard prepayment penalty can occur if you sell your home before the end of your loan term or if you refinance your mortgage.

How to avoid prepayment penalties

If your mortgage has a prepayment penalty, it should be in your loan estimate, and later, your closing documents. Keep your eyes peeled for this fee in the disclosures — it may be hidden in an area called the “Addendum to the Note,” so be sure to read it along with anything that says “addendum.”

If your auto loan or personal loan has this penalty, your contract is required to include it so that you’re notified before you sign on the dotted line. It should be in the Truth in Lending disclosures, so read those closely. And keep in mind that you can always try to negotiate the fee away.

If you are offered a loan with a prepayment penalty, ask the lender for a quote on a similar loan without one so that you can compare options. For certain mortgages, you have the right to receive an alternative offer without a prepayment penalty if you receive an offer with a prepayment penalty. If you don’t see an option you like, you can always get quotes from another lender.

If there’s a prepayment penalty in your prospective loan contract and you can’t seem to avoid it, ask the lender these questions before you sign to learn exactly how it works.

• In what exact circumstances do I have to pay the penalty?
• Does it apply to partial payments or only full payment? If partial, how much can I pay off before the fee is triggered?
• In the case of a mortgage, does it apply if the home is sold or refinanced?
• How much is the fee?

There are some loans that don’t allow prepayment penalties like FHA, VA and USDA loans.

How to deal with prepayment penalties on an existing loan

Do you have a loan, but are unsure if it includes a prepayment penalty clause? If you have a mortgage, check your closing documents, monthly billing statements and any interest rate adjustment documents. If you’re not able to track down this information, ask your lender.

Did you already sign on a loan with a prepayment penalty? Unfortunately, if it’s in your contract, you can’t make it go away. But you can find out what actions will trigger the penalty and do your best to avoid them.

Talk to your lender and find out the exact details of the prepayment penalty. Then run some basic numbers to find out what you’ll owe if you pay off the loan early or refinance it — and whether that move will save or cost you money in the long run.

FAQs about prepayment penalties

If you obtained more than one score or report at once, you may have noticed they were similar. But if you’re checking your credit to get a mortgage, these scores don’t necessarily tell you the whole story.

A mortgage lender wants a complete picture of how you use credit. But it can be challenging to put that picture together by looking at a single credit report from one of the three major consumer credit bureaus. That’s because lenders and other creditors may not report to each of the big three, resulting in each bureau having different information for you.

To help solve this, lenders can obtain special compiled credit reports that merge multiple reports into one, giving a more-complete picture of your credit history.

There are two types of compiled credit reports a mortgage lender might pull to evaluate your finances. There’s the so-called “tri-merge” report: a single, easy-to-read credit report compiled from the individual reports issued by the three major consumer credit bureaus.

And then there’s the residential mortgage credit report, which compiles at least two reports from the three bureaus and typically offers additional information to help lenders assess how risky a borrower you are.

• Tri-merge report vs. residential mortgage credit report
• When are credit reports used in the mortgage process?
• What if I need to improve my credit?

Tri-merge report vs. residential mortgage credit report

A compiled report can be a convenient tool for a mortgage lender because it consolidates your credit history from multiple credit bureaus into one organized rundown.

Because compiled reports combine info from multiple credit bureaus, they present a more-complete credit profile than a consumer sees when pulling a report from just one bureau.

This is in part because, again, your lenders and creditors may not report your information to all three bureaus — or it may take one bureau longer to update your report — so each bureau’s report and scores might differ slightly.

Mortgage lenders may be using the tri-merge credit report, or they may be using the more in-depth residential mortgage credit report, or RMCR, which they obtain from a third-party company that specializes in them. You typically won’t be able to get one of these on your own.

Borrowers may be surprised by what turns up in a tri-merge report because they only check their report at one credit bureau. But tri-merge reports occasionally surface details that may not be shown in one or more of the consumer credit reports if, for instance, a merchant reported to only one credit bureau.

While a tri-merge report will essentially show the same information you’d see by pulling your own credit reports from all three major credit bureaus, a residential mortgage credit report contains additional details you won’t find when you check your credit reports yourself.

That’s because an RMCR is designed to give the lender more insight into the risks of lending you a lot of money — in many cases hundreds of thousands of dollars — for a mortgage. For example, an RMCR may also include your employment history and current income.

When are credit reports used in the mortgage process?

A lender will typically pull and review your credit reports once you’ve completed your mortgage application.

What if I need to improve my credit?

When you’re preparing to buy a house, it’s a good idea to check all three of your credit reports as issued by the three major consumer credit bureaus — essentially creating your own compiled report.

Having all three credit reports can give you a good picture of your overall credit, which can allow you to dispute any errors or investigate any problems you find before a lender sees them.

And because your residential mortgage credit report contains many of the same factors that are in your individual credit reports at the three major consumer credit bureaus, the steps you can take to improve your credit are the same for an RMCR as they are for an individual report.

The consumer credit bureaus may prohibit or frown upon lenders sharing RMCRs with borrowers, but the report contains a lot of useful information on how you look to lenders.

If your credit reports are in relatively good shape but you’ve got one missed or late payment that you believe is hurting your credit scores, writing a goodwill letter to that creditor could erase the blemish.

When you send a creditor a goodwill letter, you’re asking it to contact the credit bureaus to remove a legitimate negative mark from your credit reports (one for which you’re at fault). While the creditor doesn’t have to consider your request, it may show mercy and ask the bureaus to remove the ding, which could improve your credit scores.

• What is a goodwill letter?
• When to consider using a goodwill letter
• How to write a goodwill letter
• What about a pay for delete letter?

What is a goodwill letter?

When you write a goodwill letter, you’re asking a creditor or collection agency to remove a negative mark on your credit reports. Why bother? Dings on your reports, such as a late payment or an account in collections, stay on your reports for seven years and weigh down your credit scores. This may make it more difficult to get approved for any future lines of credit or financial accounts.

If your misstep happened because of unfortunate circumstances like a personal emergency or a technical error, try writing a goodwill letter to ask the creditor to consider removing it. The creditor or collection agency may ask the credit bureaus to remove the negative mark. If the bureaus agree to do so, it could save you years of credit difficulties.

Take note: A goodwill letter is different from a dispute. When you dispute something on your credit reports, you’re contacting the three major consumer credit bureaus and claiming that something on your reports is wrong.

With a goodwill letter, you’re not contacting the credit bureaus, and you’re not disputing an error. You’re reaching out directly to the original creditor or collection agency to ask for forgiveness for a mistake you made and request that it makes a “goodwill adjustment.” In other words, you’re asking the creditor to remove something negative but legitimate as an act of kindness or understanding.

Keep in mind that goodwill letters aren’t an official tactic. They’re not actively publicized as a viable option by the credit bureaus, the Consumer Financial Protection Bureau or the Federal Trade Commission. In fact, the FTC states that in the case of accurate negative marks, only time will make them go away. Numerous anecdotes in online forums indicate that goodwill letters sometimes work — but since it’s not an official or legal complaint process like a dispute, creditors aren’t required to consider your request or respond to you.

“It never hurts to ask, but in most instances, a goodwill letter won’t result in removal of the negative information,” says Rod Griffin, director of consumer education and engagement at credit bureau Experian. “Lenders have a legal and contractual obligation to accurately report the history of the account, including any late payments.”

This means some lenders may reply by telling you that they’re legally obligated to keep the negative mark on your reports.

When to consider using a goodwill letter

In Griffin’s opinion, if you have a history of missed payments or other risk factors, such as high credit card balances, the lender is less likely to grant your goodwill wish. Your request will also be less effective if you don’t have a good excuse for the misstep, like if you simply forgot to make your payment.

But Griffin says there are instances in which a lender might agree to remove a late payment.

‟For example, if the consumer has never had any delinquency in the past, catches up immediately on the missed payment, and asks that it be removed from the credit report, the lender might oblige. Life happens, and they and Experian understand that.”

If you have a good track record of on-time payments and an overall strong credit history, here are some situations when it makes sense to try a goodwill letter.

• You missed a payment because of a financial hardship, like the loss of a job or a divorce.
• You missed a payment because of an emergency, like a medical crisis that put you or a loved one in the hospital.
• Your payment didn’t go through because of a technical glitch, like autopay not working correctly.
• You moved and didn’t receive the bill at your new address.

How to write a goodwill letter

You can send a goodwill letter via snail mail or email to the customer support department at your creditor or collection agency. You can find example letters, including some real ones that were successful, on the myFICO message boards.

Most advice out there suggests personalizing your letter, being sincere and polite, and showing gratitude for your business relationship. Conventional wisdom suggests you should also …

• List your account number and address.
• Briefly explain the situation that caused the error.
• Explain the steps you took to correct the issue and ensure it wouldn’t happen again.
• Mention how it’s negatively affecting you, like if it’s hindering your ability to qualify for a mortgage.
• Ask for a “goodwill adjustment” to have it removed.

If you have any supporting evidence, such as hospital bills that show you had a medical emergency, you can include copies along with your letter to bolster your case.

Another option you can try is to call the business’s customer support department and ask for a goodwill adjustment by phone.

What about a pay for delete letter?

Sometimes you can request that a debt collector or collection company remove negative items from your credit report in return for you settling the debt (known as a pay for delete letter). But, as with a goodwill letter, there’s no guarantee that paying delinquent accounts with a debt collection agency through a pay for delete offer will remove negative account information from your credit reports.

What’s next?

There’s no guarantee that a goodwill letter will work, and there’s no officially approved formula to follow in order to give yourself the best chance of success. Keep in mind that because creditors aren’t required to consider your request, you may get no response at all. And it’s also possible that the credit bureaus — after a request from a creditor — will update your credit reports without sending you any confirmation, so check your reports regularly to see if anything happened. If a month passes and you haven’t gotten a response or noticed a change on your credit reports, be persistent and call or send a follow-up letter.

Locking your credit helps prevent unauthorized access to your credit reports and may be easier and faster than a credit freeze.

Here’s how to lock your credit at each of the three major credit bureaus:

• How to lock your credit report at Equifax
• How to lock your credit report at Experian
• How to lock your credit report at TransUnion
• Pros and cons of locking your credit

How do you lock your credit at each bureau?

Unlike a credit freeze, which you can add and remove from your account as needed, a credit lock requires you to enroll in a program. To make a credit lock most effective, enroll in the programs at all three of the major consumer credit bureaus — Equifax, Experian and TransUnion.

Locking your credit costs nothing at Equifax and TransUnion if you enroll in their separate locking programs, but if you choose to use their joint program that locks both at once — and also includes credit monitoring — there’s a fee. There’s no free option from Experian, but its credit lock program also comes with additional features like credit monitoring that may make the cost worth it to you.

To enroll in a credit locking program, you’ll fill out an online form that requires personal information like your name, address and Social Security number, and then you’ll answer some identity-verification questions.

Here’s how each bureau’s credit locking program works and how to enroll.

How to lock your credit report at Equifax

Equifax’s credit lock program is called Lock & Alert™, and it’s free. Once enrolled via the Equifax website, users can lock their credit themselves on the app or the website, without additional help from Equifax.

If you want to apply for new credit, or a new employer or landlord needs to run your credit, you can temporarily unlock your credit report just as easily.

How to lock your credit report at Experian

Experian’s program, CreditLock, is offered as part of a larger service, Experian CreditWorks^SM Premium. It costs $24.99 a month.

The program comes with other perks, like credit monitoring for all three bureaus, monthly FICO® credit scores and reports for all three bureaus, up to $1 million in identity theft insurance, and a dedicated agent to help you if you think you’re a victim of fraud or identity theft. You can enroll on Experian’s website.

How to lock your credit report at TransUnion

TransUnion’s credit lock program is called TrueIdentity, and it’s also free. Like with Equifax, you can lock and unlock your credit quickly on a smartphone or computer.

The program also gives you access to your TransUnion® credit report, free monitoring alerts and up to $25,000 in identity theft insurance. TransUnion also has a premium product, called TransUnion Credit Monitoring, that allows you to lock your credit reports with both TransUnion and Equifax — but it costs $29.95 a month. You can sign up for the free TrueIdentity program on TransUnion’s website.

Pros and cons of locking your credit

Pros of locking your credit

• A credit lock can reduce your chances of becoming an identity theft victim, since lenders can’t check your credit reports while they’re locked.
• You can lock and unlock your reports yourself at any time, making it faster than a freeze if you need to authorize a legitimate credit check.
• TransUnion and Equifax allow you to lock and unlock your credit for free.

Cons of locking your credit

• If you want the highest level of credit-report protection available with a credit lock, you’d need to enroll in a credit lock program at all three major consumer credit bureaus.
• It costs money to lock your credit at Experian.

Bottom line

Locking your credit is a simple and effective way to help keep others from fraudulently opening new credit cards or taking out loans in your name. It’s also faster to put in place and lift than a credit freeze and is free at two of the major credit bureaus.

But if you want the peace of mind of having it locked at all three, you’ll have to pay for it.

Need to reach out directly to the credit bureaus? We’ve put together a guide on how to contact each major credit bureau.

Freezing your credit is usually easy and helps keep criminals from opening fraudulent credit accounts in your name.

Here’s how to freeze your credit with each of the three major consumer credit bureaus.

How do you freeze your credit at each bureau?

To freeze your credit, which is different from locking your credit, contact each of the three major consumer credit bureaus — Equifax, Experian and TransUnion — and request a credit freeze.

When you make the request, you’ll need to provide your name, address, birthdate and Social Security number. You’ll then be asked a few questions to verify your identity and make an account that you can use to unfreeze and refreeze your credit report as needed.

Note that federal law requires all three bureaus to offer freezes for free as of Sept. 21, 2018, according to the Federal Trade Commission.

Here’s how to place a credit freeze at each of the three bureaus.

How to do an Equifax credit freeze

You can easily freeze your credit online with Equifax, or via an automated phone line: 1-800-349-9960. If you’d rather talk to a human, Equifax’s customer care number is 1-888-298-0045.

How to do an Experian credit freeze

To freeze your credit at Experian, you can visit Experian’s online Freeze Center. You can also call 1-888-EXPERIAN (1-888-397-3742).

How to do a TransUnion credit freeze

TransUnion allows you to place a credit freeze online. You can also add a freeze via the automated phone system (or opt to speak to a live agent) by calling 1-800-916-8800.

Pros and cons of freezing your credit

Pros

• A credit freeze helps reduce your risk of identity theft, since potential new lenders can’t access your credit reports while the freeze is in place.
• Credit freezes are free by law, while credit monitoring services can be an expense.
• The freeze can be lifted temporarily if you need to have your credit checked.

Cons

• You have to contact each credit bureau where you’ve frozen your credit to lift the freeze if you want to apply for a credit card, mortgage or other financial product that requires a credit check.
• It can delay your applications for jobs, cellphone service or any other situation that requires a credit check, since you have to lift the freeze each time and it can take a few days for your credit freeze to thaw.
• It won’t protect you in situations where criminals already have access to your accounts (like if your bank login credentials were previously stolen via hacking).

Bottom line

Freezing your credit is an effective, cost-free way to make it harder for thieves to open up credit cards or other financial accounts in your name. It also can reduce your chances of becoming an identity theft victim.

But keep in mind that it can be a hassle to remove a freeze from all three bureaus every time you need a credit check. You’ll want to be sure it’s the move you want to make.

Expressed as a percentage, your debt-to-income, or DTI, ratio is all your monthly debt payments divided by your gross monthly income. It helps lenders determine whether you can truly afford to buy a home, and if you’re in a good financial position to take on a mortgage.

• How to calculate DTI ratio
• What’s a good debt-to-income ratio?
• How to lower your DTI ratio

How to calculate DTI ratio

Image: djupdatedti

Understanding how your DTI ratio is calculated seems simple, but there is an additional layer of complexity since there are two types of DTI: front-end and back-end ratios.

Front-end DTI

Your front-end ratio reveals how much of your pretax income would go toward a mortgage payment. Your front-end DTI ratio also examines how much of your pretax income would go toward housing expenses, such as property taxes and homeowners insurance. Lenders tend to prefer that your front-end DTI ratio does not exceed 28%. If your DTI is higher than that, it could be a sign that you’ll have trouble making ends meet.

Back-end DTI

To help determine if you can afford a mortgage loan, a lender may calculate your back-end DTI ratio, which shows how all of your debts — including your existing debts with a mortgage payment added in — compare to your pretax income. If the number is too high, it could indicate that you may not have enough income to pay both your debts and day-to-day expenses. 

Your back-end ratio — which is typically the default term when discussing DTI — is calculated by dividing your total monthly debt payments by your gross monthly income. Your gross income is all of the money you’ve earned before taxes, including paychecks and any investments, or other deductions such as health insurance or retirement plan contributions.

The monthly debt payments included in your back-end DTI calculation typically include your proposed monthly mortgage payment, credit card debt, student loans, car loans, and alimony or child support. Don’t include non-debt expenses like utilities, insurance or food. Divide that number by your gross monthly income, then multiply that number by 100 to get the percentage used as your DTI ratio.

Calculating back-end DTI ratio: Some examples

Keep in mind that homeownership comes with many expenses that aren’t considered debts, and therefore aren’t factored into your DTI equation. Think homeowners insurance, utilities, homeowners association fees, property taxes, routine maintenance and repairs … you get the point. Other basic expenses not factored into your DTI calculation include food and transportation.

What’s a good debt-to-income ratio?

The lower your back-end DTI ratio, the more attractive you may be as a borrower to lenders. Most lenders look for a DTI that’s 43% or less.

That’s because homebuyers with higher DTI ratios — meaning those with more debt in relation to their income — are generally considered more likely to have trouble making their mortgage payments.

According to Wells Fargo, it’s good to have a DTI ratio of 35% or less. Wells Fargo says this shows your debt is at a manageable level and that you have plenty of money left over once your bills are paid. A DTI ratio in the 36% to 49% range isn’t optimal and ideally should be lowered so that you’re better able to handle any unexpected expenses, Wells Fargo says. If you try to get a mortgage with a DTI in this range, your lender may ask you to meet additional eligibility criteria.

If your DTI ratio is 50% or higher, your borrowing options may be limited, since at least half of your income is already going to debt, according to Wells Fargo. Increasing your debt may make it difficult for you to meet your obligations and prepare for unexpected costs.

How to lower your DTI ratio

There are two key ways to lower your DTI ratio: reducing your debt and increasing your income.

Here are some tips for decreasing your DTI ratio.

• Ask for a raise at work to boost your income
• Take on a part-time job or freelance work on the side
• Make extra payments to your credit card to lower the balance
• Reduce your day-to-day expenses so you can make a bigger dent in your debts, such as your student loan or auto loan balances
• Avoid making large purchases on credit that aren’t absolutely necessary
• Avoid taking out any new loans or lines of credit

Bottom line

If your DTI ratio is too high, you may not qualify for a mortgage loan with many lenders. But if you’re willing to lower your debt load or find a way to increase your income, you can lower your DTI ratio and be in a better position to get approved for a mortgage.