Credit Score and Debt-to-Income: The Two Numbers That Determine Your Approval

Master credit score and DTI fundamentals: understand how they're calculated, real Seattle examples showing cost impact, and proven strategies to improve both in 3-6 months.

Tags:credit, dti, mortgage, washington, financing, credit-score, debt-ratio
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You make $180,000 a year. You have $100,000 saved for a down payment. You're ready to buy. Then the lender says "Your credit score is 640 and your DTI is 48%. You're approved for $650,000, not the $900,000 you wanted."

Two numbers - credit score and debt-to-income ratio - determine how much you can borrow and at what interest rate. In Seattle's expensive market, a 100-point credit score difference can mean $200-300 more per month in interest, or $72,000-108,000 over 30 years.

In this article, you'll learn how credit scores affect mortgage approval and interest rates, what debt-to-income ratio is and how lenders calculate it, Seattle tech worker considerations (RSU income, stock options, student loans), how to improve your credit score in 3-6 months, and see real examples showing the cost of poor credit.

Table of Contents

Part 1: Credit Scores Explained

What Lenders See

When you apply for a mortgage, lenders pull credit reports from all three bureaus:

  • Experian
  • Equifax
  • TransUnion

They use the middle score (not average, not highest).

Example:

  • Experian: 720
  • Equifax: 695
  • TransUnion: 710
  • Lender uses: 695 (middle score)

Important: The score you see on Credit Karma or your credit card app is often different from what lenders see. Those use VantageScore 3.0. Lenders use FICO Score 2, 4, and 5 (older models).

Credit Score Ranges and Impact

Excellent (740+):

  • Best interest rates
  • Lowest fees
  • Easiest approval
  • Most loan options

Good (680-739):

  • Competitive rates (0.25-0.5% higher than excellent)
  • Standard approval
  • Most loan types available

Fair (620-679):

  • Higher rates (0.5-1% higher than excellent)
  • May need larger down payment
  • Limited to conventional or FHA
  • More documentation required

Poor (580-619):

  • FHA only (conventional requires 620+)
  • Highest rates (1-1.5% higher)
  • Larger down payment may help
  • Difficult approval

Very Poor (<580):

  • FHA requires 10% down (not 3.5%)
  • Very high rates
  • May need to improve before applying
  • Consider waiting 6-12 months

Interest Rate Impact

Real Seattle example ($750,000 home, 10% down, $675,000 loan):

Credit score 760:

  • Rate: 6.5%
  • Payment: $4,265/month
  • Total interest (30 years): $860,400

Credit score 680:

  • Rate: 7.0%
  • Payment: $4,490/month
  • Total interest (30 years): $941,400
  • Extra cost: $225/month = $81,000 over 30 years

Credit score 640:

  • Rate: 7.5%
  • Payment: $4,720/month
  • Total interest (30 years): $1,024,200
  • Extra cost: $455/month = $163,800 over 30 years

Lesson: A 120-point credit score difference costs $163,800 over 30 years. Worth spending 3-6 months improving your score.

What Affects Your Credit Score

Payment history (35%):

  • Most important factor
  • Late payments hurt significantly
  • 30+ days late: -60-110 points
  • 90+ days late: -100-130 points
  • Stays on report for 7 years

Credit utilization (30%):

  • Percentage of available credit used
  • Under 30% is good
  • Under 10% is excellent
  • Over 50% hurts score

Example:

  • Credit limit: $20,000
  • Balance: $8,000
  • Utilization: 40% (too high)
  • Should be: Under $6,000 (30%)

Length of credit history (15%):

  • Average age of accounts
  • Older accounts help
  • Don't close old cards
  • New accounts lower average age

Credit mix (10%):

  • Types of credit (cards, loans, mortgage)
  • Mix is better than single type
  • Not critical for mortgage approval

New credit (10%):

  • Recent applications
  • Hard inquiries (stay 2 years)
  • Multiple mortgage inquiries in 45 days = 1 inquiry
  • Avoid opening new credit before buying

How to Check Your Credit

Free options:

  • AnnualCreditReport.com (official, free once/year from each bureau)
  • Credit Karma (free, updates weekly, VantageScore)
  • Experian (free FICO score)
  • Your credit card (many offer free FICO scores)

What to check:

  • Current scores from all three bureaus
  • Payment history (any late payments?)
  • Credit utilization (under 30%?)
  • Errors or inaccuracies
  • Collections or judgments

Pro Tip: Check all three bureaus. Errors on one bureau won't show on others. Dispute any errors immediately (can take 30-60 days to resolve).

Part 2: Debt-to-Income Ratio (DTI)

What DTI Is

Debt-to-income ratio compares your monthly debt payments to your gross monthly income.

Formula:

DTI = (Total Monthly Debt Payments) / (Gross Monthly Income) × 100

Two types lenders check:

Front-end DTI (housing ratio):

  • Housing costs only (mortgage, taxes, insurance, HOA)
  • Should be ≤28% of gross income
  • Some lenders allow up to 31%

Back-end DTI (total debt ratio):

  • All debt (housing + car + student loans + credit cards + other)
  • Should be ≤43% of gross income
  • Some lenders allow up to 50% with strong credit

How Lenders Calculate DTI

Monthly debts included:

  • Proposed mortgage payment (P&I)
  • Property taxes
  • Homeowners insurance
  • HOA fees
  • Car loans/leases
  • Student loans
  • Credit card minimum payments
  • Personal loans
  • Child support/alimony

Monthly debts NOT included:

  • Utilities
  • Phone bills
  • Insurance (car, health, life)
  • Groceries
  • Entertainment
  • Subscriptions

Income included:

  • Base salary
  • Bonuses (2-year average)
  • Commission (2-year average)
  • RSUs/stock options (2-year average)
  • Rental income (75% of gross)
  • Self-employment income (2-year average)

Real DTI Calculation

Seattle tech worker example:

Income:

  • Base salary: $180,000/year = $15,000/month
  • RSU income: $60,000/year = $5,000/month (2-year average)
  • Total gross income: $20,000/month

Existing debts:

  • Car payment: $600/month
  • Student loans: $800/month
  • Credit card minimums: $150/month
  • Total existing debt: $1,550/month

Proposed housing:

  • Mortgage (P&I): $4,500/month
  • Property taxes: $700/month
  • Insurance: $150/month
  • HOA: $0
  • Total housing: $5,350/month

DTI calculation:

  • Front-end DTI: $5,350 / $20,000 = 26.75% ✅ (under 28%)
  • Back-end DTI: ($5,350 + $1,550) / $20,000 = 34.5% ✅ (under 43%)

Result: Approved

DTI Limits by Loan Type

Conventional loans:

  • Front-end: 28%
  • Back-end: 43% (up to 50% with compensating factors)

FHA loans:

  • Front-end: 31%
  • Back-end: 43% (up to 50% with strong credit)

VA loans:

  • No front-end limit
  • Back-end: 41% (flexible with residual income test)

USDA loans:

  • Front-end: 29%
  • Back-end: 41% (flexible with compensating factors)

Jumbo loans:

  • Front-end: 28%
  • Back-end: 43% (stricter than conforming)

When DTI Is Too High

Example: DTI over 43%

Income:

  • Gross: $12,000/month

Debts:

  • Car: $700/month
  • Student loans: $1,200/month
  • Credit cards: $300/month
  • Proposed housing: $3,800/month
  • Total: $6,000/month

DTI: $6,000 / $12,000 = 50% ❌ (over 43%)

Options to fix:

  1. Pay off car loan ($700/month freed up)
  2. Refinance student loans to lower payment
  3. Pay off credit cards
  4. Buy less expensive home
  5. Increase income (get raise, second job, RSUs)

Part 3: Seattle Tech Worker Considerations

RSU Income

How lenders count RSUs:

  • Need 2-year history of RSU vesting
  • Use 2-year average
  • Stock price volatility affects amount
  • May need to show vesting schedule

Example:

  • Year 1 RSU income: $80,000
  • Year 2 RSU income: $60,000
  • Lender uses: $70,000/year = $5,833/month

Challenges:

  • Stock price drops reduce qualifying income
  • New job with RSUs: may not count until 2-year history
  • Unvested RSUs don't count

Strategy:

  • Time purchase when stock price is stable/high
  • Wait 2 years at new job before buying
  • Use RSUs for down payment, not qualifying income

Stock Options

How lenders count stock options:

  • Generally don't count toward income
  • Can use for down payment (after exercising and selling)
  • Tax implications significant

Example:

  • Exercise options: $50,000 cost
  • Sell shares: $150,000 proceeds
  • Taxable gain: $100,000
  • Taxes owed: $30,000-40,000
  • Net for down payment: $110,000-120,000

Pro Tip: Consult tax advisor before exercising options for down payment. Timing matters for tax liability.

Student Loans

2024 rule changes:

  • Old rule: 1% of balance counted as payment
  • New rule: Actual payment or 0.5% of balance (whichever is greater)

Example:

  • Student loan balance: $100,000
  • Actual payment: $0 (income-driven, $0 payment)
  • Old rule: $1,000/month counted (1% of $100,000)
  • New rule: $500/month counted (0.5% of $100,000)

Impact on DTI:

  • Old rule: Higher DTI, harder to qualify
  • New rule: Lower DTI, easier to qualify
  • Significant for tech workers with high student debt

Strategy:

  • If in forbearance, get on income-driven plan
  • Lower payment = lower DTI
  • Don't pay off student loans just to buy house (unless rate is high)

H-1B Visa Holders

Income considerations:

  • Need work authorization
  • 2-year job history preferred
  • May need letter from employer about visa renewal
  • Some lenders specialize in visa holders

Challenges:

  • Job stability concerns
  • Visa renewal uncertainty
  • May need larger down payment (15-20%)

Strategy:

  • Work with lenders experienced with visa holders
  • Have strong employment letter
  • Larger down payment helps
  • Consider timing around visa renewal

Part 4: How to Improve Your Credit Score

3-Month Improvement Plan

Month 1: Quick wins

Pay down credit cards below 30% utilization:

  • Check all card balances
  • Pay down highest utilization cards first
  • Keep cards open (don't close)
  • Impact: +20-40 points

Dispute errors:

  • Check all three credit reports
  • Dispute any errors online
  • Follow up in 30 days
  • Impact: Varies (can be significant)

Become authorized user:

  • Ask family member with excellent credit
  • Must be on account 2+ years
  • Their good history helps you
  • Impact: +10-30 points

Month 2: Build momentum

Pay all bills on time:

  • Set up autopay for everything
  • Payment history is 35% of score
  • Even one late payment hurts
  • Impact: Prevents score drop

Don't apply for new credit:

  • Each application = hard inquiry
  • Multiple inquiries hurt score
  • Wait until after mortgage closes
  • Impact: Prevents 5-10 point drop per inquiry

Keep credit card balances low:

  • Pay off in full each month
  • Or keep under 10% utilization
  • Report date matters (not due date)
  • Impact: +10-20 points

Month 3: Final push

Pay down more debt:

  • Focus on credit cards
  • Lower utilization = higher score
  • Target under 10% on all cards
  • Impact: +10-30 points

Don't close old accounts:

  • Older accounts help score
  • Closing reduces available credit
  • Increases utilization percentage
  • Impact: Prevents score drop

Check score again:

  • Pull all three bureaus
  • Verify improvements
  • Dispute any new errors
  • Impact: Confirmation of progress

Realistic improvement: 40-80 points in 3 months

6-Month Improvement Plan

If you have more time, you can make bigger improvements.

Months 1-3: Follow 3-month plan above

Months 4-6: Advanced strategies

Pay off collections:

  • Negotiate pay-for-delete
  • Get agreement in writing
  • Pay with certified check
  • Impact: +20-50 points

Goodwill letters:

  • Write to creditors about late payments
  • Explain circumstances
  • Request removal
  • Impact: Varies (worth trying)

Credit builder loan:

  • Small loan ($500-1,000)
  • Held in savings while you pay
  • Builds payment history
  • Impact: +10-20 points

Increase credit limits:

  • Ask for limit increases
  • Don't use the extra credit
  • Lowers utilization percentage
  • Impact: +10-20 points

Realistic improvement: 80-120 points in 6 months

What NOT to Do

Don't close credit cards:

  • Reduces available credit
  • Increases utilization
  • Shortens credit history
  • Hurts score

Don't max out cards:

  • Even if you pay off monthly
  • Utilization reported on statement date
  • Keep under 30% always

Don't apply for new credit:

  • Each application hurts score
  • Multiple inquiries compound
  • Wait until after mortgage closes

Don't co-sign loans:

  • Counts as your debt
  • Increases DTI
  • Hurts if they miss payments

Don't ignore errors:

  • Errors won't fix themselves
  • Can significantly hurt score
  • Dispute immediately

Part 5: How to Lower Your DTI

Pay Off Debt

Prioritize by impact:

Option 1: Pay off car loan

  • Frees up $400-800/month
  • Immediate DTI improvement
  • Use savings or bonus

Option 2: Pay off credit cards

  • Frees up minimum payments
  • Also improves credit score
  • Highest impact per dollar

Option 3: Pay off personal loans

  • Frees up monthly payment
  • Reduces total debt
  • Consider if rate is high

Don't pay off student loans just for DTI:

  • Low interest rates (3-5% typical)
  • Better to keep cash for down payment
  • New rules make student loans less impactful

Increase Income

Options:

  • Ask for raise
  • Get promotion
  • Take second job (need 2-year history)
  • Freelance income (need 2-year history)
  • Rental income (if you own property)

Tech workers:

  • Negotiate higher base (counts immediately)
  • RSU refresh (counts after 2 years)
  • Bonus (counts as 2-year average)

Buy Less Expensive Home

Most effective strategy:

  • Lower mortgage = lower DTI
  • More likely to get approved
  • More comfortable payment

Example:

  • Target: $900,000 home ($5,500/month payment)
  • DTI: 48% (too high)
  • Adjust to: $750,000 home ($4,500/month payment)
  • DTI: 40% (approved)

Refinance Existing Debt

Student loans:

  • Extend term to lower payment
  • Reduces DTI
  • May increase total interest paid

Car loan:

  • Refinance to lower rate
  • Extend term to lower payment
  • Frees up $100-200/month

Important: Only refinance if it helps you qualify. Don't extend debt just to buy a more expensive home.

Part 6: Real Scenarios

Scenario 1: Good income, poor credit

Situation:

  • Income: $200,000
  • Credit score: 640
  • Debts: $1,000/month
  • Savings: $150,000

Problem: Low credit score means high interest rate

Solution:

  • Wait 3-6 months
  • Follow credit improvement plan
  • Target 680+ score
  • Savings: $200-300/month in interest

Scenario 2: Good credit, high DTI

Situation:

  • Income: $150,000
  • Credit score: 740
  • Debts: $3,500/month (car $700, student loans $2,500, cards $300)
  • DTI: 52% (too high)

Problem: Too much existing debt

Solution:

  • Pay off car loan ($700/month freed)
  • Pay off credit cards ($300/month freed)
  • New DTI: 43% (approved)
  • Cost: $25,000 from savings

Scenario 3: Tech worker with RSU volatility

Situation:

  • Base: $180,000
  • RSUs: $100,000 (Year 1), $60,000 (Year 2)
  • Credit: 720
  • Stock price dropped 40%

Problem: RSU income dropped, reducing qualifying income

Solution:

  • Wait for stock recovery
  • Or buy based on base salary only
  • Or use RSUs for larger down payment (lower loan amount)

Summary

Key takeaways:

  • Credit score 740+ gets best rates - every 20 points costs $50-100/month in interest
  • DTI should be under 43% - front-end under 28%, back-end under 43%
  • Improve credit in 3-6 months - pay down cards, dispute errors, don't apply for new credit
  • Tech workers: RSU income counts but needs 2-year history and stock volatility matters
  • Student loans: New 2024 rules make them less impactful on DTI
  • Lower DTI: Pay off car/cards, increase income, or buy less expensive home
  • Check credit 3-6 months before buying - gives time to fix issues

Next steps:

  1. Check your credit scores from all three bureaus (AnnualCreditReport.com)
  2. Calculate your DTI using the formula in this article
  3. Identify issues - credit score under 680? DTI over 43%?
  4. Create improvement plan - 3 months or 6 months depending on issues
  5. Track progress monthly - check scores and recalculate DTI
  6. Get pre-approved once credit is 680+ and DTI is under 43%

This article provides general information about credit scores and DTI and should not be considered financial advice. Your situation is unique. Consult with a mortgage lender and financial advisor for guidance specific to your circumstances.

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