Collectively, Americans carry trillions in household debt. And the biggest single element of that burden by far is mortgage debt: It comprises close to $12 trillion of the $17.29 trillion overall.
Latest statistics on average mortgage debt
Mortgage
The average mortgage debt balance per household is $241,815 as of Q2 2023, a 4% increase from 2022.
The total mortgage debt balance in the U.S. is $12.14 trillion as of Q3 2023, an increase of $126 billion over the previous quarter.
The average mortgage balance exceeds $1 million in 26 U.S. cities, primarily on the East and West Coasts.
Mortgage originations collectively total $386 billion, as of Q3 2023, well below the trillion-dollar levels in 2020-21.
Total home equity line of credit debt equals $349 billion as of Q3 2023, more than a $25 billion year-over-year increase.
The average credit score for purchase mortgage holders is 733 as of November 2023.
The total debt service to income ratio (DTI) of U.S. households is projected to rise to 11.7% by 2025, up from 9.9% in 2022. The mortgage DTI alone will increase to 4.5%.
Total U.S. household debt is $17.29 trillion as of Q3 2023, an increase of $3.1 trillion since the end of 2019.
Annual average mortgage debt
Mortgage debt is the heavyweight when it comes to household debt, dwarfing credit card balances, student loans and auto loans. After the tough blow dealt by the 2007-08 subprime mortgage crisis, the annual average mortgage debt declined sharply. However, since 2013, the pendulum began to swing back, with mortgage debt on a steady rise. Since the pandemic, increases in home prices and in interest rates kicked the climb into overdrive.
So, what does this mean for the annual average American mortgage debt in 2024? With housing inventory still tight, interest rates still elevated, and people seeking larger homes to accommodate their evolving lifestyles, mortgage balances will likely continue to grow, though perhaps at a slower pace.
Most common types of debt
Mortgages continue to be a significant portion of household debt in the United States, with a current total of $12.14 trillion owed on 84 million mortgages. This equates to an average American mortgage debt of $144,593 per person listed with a mortgage on their credit report. Despite interest rates hovering above 7 percent, mortgage demand remains strong, driven by two key factors: an increase in the number of people seeking mortgages, and larger mortgages at that.
The record-low mortgage interest rates of recent years allowed buyers to purchase higher-priced homes or refinance their existing mortgages while maintaining low monthly payments. This has led to a rise in outstanding mortgage debt, which currently accounts for 70.2 percent of consumer debt in the U.S., according to New York Federal Reserve figures.
Here’s a look at the other common types of debt among American households, based on credit reporting company Experian’s midyear consumer debt review:
Auto loans. In the year between Q2 2022 and Q2 2023, auto loan debt witnessed a 5.8 percent increase, rising from $1.42 trillion to $1.5 trillion. This rising trend in auto loan debt can be attributed to persistent inventory shortages, escalating prices for new and used vehicles, and supplementary expenses such as auto insurance.
Credit card debt. Between Q2 2022 and Q2 2023, credit card debt surged by 16.3 percent, amounting to a total of $1.02 trillion. This increase is largely attributed to factors such as inflation and increasing credit card interest APRs. In a similar vein, unsecured personal loans also saw a 21.3 percent growth spurt, moving from $156.1 billion in 2022 to $189.4 billion in 2023.
Home equity lines of credit (HELOCs). As of Q2 2023, HELOCs have seen an 8.5 percent increase compared to the same quarter in 2022, reaching a total of $322 billion. This growth can be attributed to several factors. Firstly, the ongoing rise in home prices has increased homeowners’ equity, making it easier for them to tap into their home’s value through HELOCs. Additionally, the current high interest rate environment has made borrowing against home equity more attractive than refinancing a mortgage or taking out other types of loans.
Student loan debt balances. Student loan debt has long been a significant player in U.S. household debt. However, an 8 percent decrease occurred between Q2 2022 and Q2 2023, with loan balances falling from $1.51 trillion to $1.39 trillion. Influential factors behind this decline include the moratorium on interest on student loans, borrowers making payments during the three-year payment pause that concluded this year, and loan forgiveness initiatives introduced by the Department of Education.
Average mortgage debt by generation
Americans generally begin taking on debt as young adults, taper off their pace of borrowing in middle age and work to pay off loans near or during retirement.
Generation
Average mortgage debt
Generation Z
$229,897
Millennials
$295,689
Generation X
$277,153
Baby boomers
$190,441
Silent Generation
$141,148
Source: Experian
For each generation, this trend has taken place in tandem with mortgage rate fluctuations and home price appreciation, which has accelerated dramatically in recent years. In February 2012, the median existing-home price was $155,600, according to the National Association of Realtors. By the same time in 2017, the median was $228,200. As of November 2023, the median home price was $387,600.
States with the highest and lowest mortgage debt
These states had the highest average outstanding mortgage balance per borrower as of the end of 2022, according to Experian:
District of Columbia – $492,745
California – $422,909
Hawaii – $387,277
Washington – $331,658
Colorado – $319,981
In these states, borrowers are much closer to paying off their home loans:
West Virginia – $124,445
Mississippi – $139,046
Ohio – $139,618
Indiana – $141,238
Kentucky – $144,222
How mortgage debt compares to other household debt
In comparison to other types of household debt, mortgage debt often tends to take the lion’s share — largely due to the substantial cost of real estate (a home is likely to be the single biggest asset an individual ever purchases). While mortgage debt tends to be sizable, it is spread over a lengthy period, usually over a term of 15 to 30 years. This mitigates its impact on a household’s monthly budget, especially when compared to high-interest, short-term debt like credit card balances.
That longevity works to borrowers’ advantage in another way: Lenders often view mortgage-holders favorably for their demonstrated ability to manage large, long-term financial commitments. In fact, in contrast to other obligations, a mortgage is often viewed in a positive light by creditors, because — unlike with personal loans or credit card bills — your payment acts as an investment in an appreciating asset. Each monthly installment you pay reduces the principal owed on your house, increasing your stake in the property over time. This home equity can later be leveraged for financial liquidity or for securing lower-interest loans — or just held onto, enhancing your net worth and those of your descendants.
In short, a mortgage is considered “good debt,” due to its role in building equity, growing wealth and demonstrating creditworthiness.
Generally, you shouldn’t use a home equity loan or HELOC to buy a car.
Although they may offer longer terms and lower monthly payments, home equity loans currently carry higher interest rates than auto loans.
Because cars lose value over time, they’re not worth the risk of diluting your ownership stake in your home and risking foreclosure.
It might make sense to use home equity financing to buy a car and for another aim, like a big home improvement project.
The most common way to buy a new car is with a car loan, of course. But auto loans are not the only financing game in town. If you’re a homeowner, it might be tempting to tap into your equity to purchase those wheels, via a home equity loan or a HELOC, its credit-line cousin.
This approach, however, involves vastly different considerations than an auto loan. Here’s how to determine whether using a home equity loan to buy a car is the best option for you.
Should I use my home equity to buy a car?
Frankly, no. Avoid buying a car using home equity, if possible.
With a home equity loan, your home is the collateral for the debt. If you fall behind on repayment, the lender can foreclose on the home. Translation: You could lose it.
That goes for home equity lines of credit (HELOCs), too. Can you use a HELOC to buy a car? Sure. But should you? Probably not, and for the same reason: That line of credit uses your home as collateral, putting what’s likely one of your biggest assets at risk.
Generally, it’s best to tap your home equity if you’re going to spend the funds on projects or expenses that further your financial or professional well-being, such as renovating your house or paying college tuition. Because cars don’t hold their value well over time, it doesn’t make sense to tie your home up with financing for one — you’d be repaying a loan on an item that won’t be worth much when all is said and done. (In contrast, real estate generally appreciates over time, especially when money is spent to improve the property.)
Differences between home equity loans and auto loans
Auto loans
Home equity loans
HELOCs
Collateral required
Car
Home
Home
Typical repayment terms
2 to 5 years
5 to 30 years
10 to 20 years (after 5-10 year draw period)
Usual rate type
Fixed
Fixed
Variable
Repayment schedule
Monthly
Monthly
Monthly interest-only repayments during the draw period (usually the first 5-10 years); monthly payments during the repayment period
Fees
Origination fee (0.5-1% of loan amount); documentation fee
Closing costs (avg. 1% of borrowing amount)
Closing costs (avg. 1% of borrowing amount)
Home equity loans and auto loans are both types of secured debt: that is, they are backed by something that acts as collateral for the loan. While a car loan is secured by the car you purchase, a home equity loan is secured by your home. In both cases, if you fail to repay, the lender has the right to seize, respectively, the car or the house.
However, the repayment terms are very different: You could have as long as 30 years to repay a home equity loan, versus the typical two to five years associated with an auto loan. Depending on how much you borrow with the home equity loan, this longer timeline could mean you have much lower monthly payments compared to the payments on a five-year car loan.
Remember, however: A car is a depreciating asset. By the time you’re finished repaying a 15 or 20-year home equity loan or HELOC, your car won’t be worth nearly as much as what you borrowed (and paid in interest) to get it. A new car loses 23.5 percent of its value after about one year and 60 percent in the first five years, according to Edmunds.
If you’re hoping to save money on interest with a home equity loan, think again. While home equity loans did have lower interest rates compared to auto loans for some time, that trend has reversed. Now, many auto loan offers are lower or comparable to the rates on home equity products: As of December 2023, new car loan APRs were running more than a percentage point lower, on average, than home equity APRs.
In addition, you might need to pay closing costs for the home equity loan, which are typically 1 percent of the principal (though they can run you anywhere from 2 percent to 5 percent) — an expense you wouldn’t be on the hook for with an auto loan.
The pros and cons of using home equity to buy a car
Home equity loans and HELOCs were once more of a universal financing go-to, because their interest was tax-deductible — no matter what you used the funds for — provided you itemized deductions on your tax return. That changed with the Tax Cuts and Jobs Act of 2017. It decreed the interest could only be deductible if the loan went towards improving, repairing or buying a home; it also made itemizing deductions less feasible in general.
So now, there are more risks than rewards when it comes to getting a home equity loan for a car. That said, let’s look at the pros and cons of using a home equity loan vs. car loan to buy a vehicle.
Pros of using a home equity loan to buy a car
Longer term, lower payments: Home equity loans are structured in such a way that you can repay the money over a much longer period of time. Most car loans last between two and five years; a home equity loan lasts between five and 30 years. If you only borrow the amount you need for the car, this longer timeline might translate to lower monthly payments, all other things being equal.
Flexibility in using funds: If you take out a home equity loan or HELOC to buy a car, you don’t necessarily need to use all the money on your vehicle. If you take out $50,000 of your home’s equity, for example, you might use $20,000 to buy the car and $30,000 on a kitchen remodel. Since the larger chunk of money would go toward improving your home, money you’ll theoretically get back when you sell, this strategy makes better financial sense than using a home equity loan to buy a car alone. You might also be able to deduct the interest on the sum spent on the kitchen, if you itemize on your tax return.
Cons of using a home equity loan to buy a car
Decreased equity: By getting a home equity loan, you’re depleting some of your ownership stake, which has serious implications. For one, you might end up needing that equity in an emergency. For another, you might find you’ve taken on too much debt, in-between your first mortgage and the home equity loan. This could eat into your bottom line if you need or want to sell the home in the future (home equity loans must be repaid in full if a home is sold).
More onerous application: Applying for home equity financing is somewhat akin to taking out a mortgage and, in addition to your financials, the lender will consider the home’s value and the amount of your ownership stake. Bottom line: We’re talking weeks or even months for approval, vs. days with auto loans.
Foreclosure risk: If you can’t or don’t repay the home equity loan, you won’t lose the car, but you could lose your home — a much more important asset.
No financial gain: A car loses value over time, so, with a decades-long home equity loan term, you might be paying for an asset that isn’t worth much in the end. If your car is no longer usable, this could also put you in the unenviable position of repaying a home equity loan while financing a new vehicle.
Closing costs: Some home equity loans come with upfront closing costs. If you can afford to pay these, you might be better off putting some (or all) of those funds toward a down payment on an auto loan instead.
Bottom line on buying cars with home equity loans
It’s possible to use your home equity to take out a loan for a car, but it’s a risky move. With the interest rates on home equity loans and HELOCs creeping up, it makes more sense to compare auto loan offers first.
Of course, this assumes you’re taking out a home equity loan for a car purchase – and nothing else. If you plan to use only some of the funds to purchase a car and the rest for other, more investment-worthy aims — like, say, building a new garage to house those new wheels — it can still make sense to tap your equity.
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Editorial Disclosure:Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.
Snapshot: Provided that you’re a student, you can gain access to fantastic cash back rates (anywhere from 1% – 10%, depending on the category), even if you have no prior credit. Did we also mention the annual_fees annual fee?
Pros
Cons
annual_fees annual fee
This card allows balance transfers but there’s no introductory APR for them
3% cash back on dining, select streaming services, entertainment and grocery store purchases
Potentially higher APR
A potential for relatively low APR for a student credit card
bonus_miles_full
Like what you see? Learn how to apply for the Capital One SavorOne Student Cash Rewards Card
Capital One SavorOne Cash Rewards Card – which you generally have to have at least a good credit score to qualify for (and it has a higher regular APR)*.
You get access to amazing cash back rates on dining and grocery shopping – which are common expenses – in addition to a flat 1% cash back on everything else. This card does have a relatively high APR (see how it compares to other cards) but no annual fee, so as long as you pay your statement on time, you won’t have to worry about interest. (Paying your credit card bill on time will also help you build good credit in preparation for your next card, auto loan, or apartment application, after you graduate).
When you’re just starting out on your own having no credit or bad credit can be a barrier to many things you need in adulthood, like an apartment lease, a car loan or a halfway decent credit card. You need credit to get credit, and most of the time the options aren’t great.
This card is great (actually). Like we said before, many of this card’s benefits are very similar to the card_name. But where you need great credit to qualify for that card, you can qualify for the same benefits by being in school.
So if you’re worried about a low credit score, or maybe you’ve just turned 18 and are starting out on your own and have no credit, provided that you’re a student (among other qualifying factors) this is a great credit card to apply for.
Great Rewards for Dining
If you’re cramming for a test and just don’t have the time to plan out meals and need to Uber Eats some food to keep the study session going uninterrupted, at least you’ll be making a whopping 10% (10%!) cash back on your splurge (through 11/14/2024). 3% cash back on grocery store purchases (excluding superstores like Walmart® and Target®) is also great – not only are groceries a regular expense, but 3% is a decently high rate for a cash back category.
Whether you’re the kind of shopper who loves spending time researching a great deal, or you don’t have the mental energy to pay attention to such things, this card has you covered. Not only does it have great cash back rates, but it also has a varied enough mix of rewards categories that you can earn cash back without having to go out of your way to make unusual purchases.
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The Drawbacks
No Introductory APR
If you’re looking for a 0% APR offer, you won’t find it with this card. That means you can’t use this card to make a major purchase you can pay off over a year or two without accruing interest. That’s certainly not a deal breaker for most students, but it’s something to consider.
Potentially High APR
It’s hard to say what ongoing APR you will get when you apply for this card, the quoted range is quite wide at reg_apr,reg_apr_type. If you qualify for a lower APR, great! But if you end up paying a higher APR, that could be a drawback. Especially if you want to rely on this card to help you cover larger purchases.
Is It Worth It?
For students who eat out or grab coffee on the go a lot, this card may be a good option. It lets you earn decent cash back perks, and as long as you pay off your statement every month, that’s cash in your pocket.
What Are The Credit Limits For Capital One SavorOne Student Cash Rewards Card (Minimum and Maximum)?
Your credit limit is determined by your credit history and factors such as income. From what we’ve seen other users report, credit limits may range from $300 to $700 (at least initially), though approvals could certainly fall outside those ranges.
How Soon Can I Increase My Credit Limit After Being Approved For A Capital One SavorOne Student Cash Rewards Card?
Capital One may let you request a credit limit increase after 6 months, though approval of the increase is not guaranteed. During that time you will need to demonstrate that you can handle your credit responsibly, which means both using and paying off your bill on-time.
How Good Is A Capital One SavorOne Student Cash Rewards Card For Building Credit?
This is an excellent card for building credit because you don’t necessarily need great credit to get it. Capital One is a well-recognized credit card provider that typically reports payment history to the credit bureaus. That helps you build a stronger credit profile.
Learn more about how to apply for the Capital One SavorOne Student Cash Rewards Card here:
Advertiser Disclosure: Credit.com has partnered with CardRatings for our coverage of credit card products. Credit.com and CardRatings may receive a commission from card issuers.
Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
Conforming loans are mortgages that meet the criteria set by the Federal Housing Finance Agency (FHFA). They’re eligible to be purchased by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
These loans have set limits and guidelines for borrower credit profiles, down payments and property types.
The FHFA adjusts the conforming loan limits every November to account for changes in the housing market.
If you’re shopping for a mortgage, you may have heard the term “conforming loan” thrown around. But what does it mean, how does it work and why should you consider getting one? Here’s everything you need to know about conforming loans and how they can benefit you.
What is a conforming loan?
A conforming loan refers to a type of conventional mortgage that aligns with the criteria set by the FHFA. Meeting these established standards makes these loans eligible to be purchased by Fannie Mae and Freddie Mac. By buying mortgages, Fannie and Freddie reduce risk for lenders. This practice also frees up more money for lenders to use to fund additional mortgages. Because of this, most mortgage lenders offer conforming loans.
Within conforming loans, there’s the option for a fixed or an adjustable rate. Term lengths can also vary, with 15- and 30-year terms being the most popular.
How do conforming loans work?
After you take out a conforming loan from a lender, here’s what happens next:
After your loan closes, your lender submits your loan to either Freddie Mac or Fannie Mae for purchase. They examine your loan paperwork, request clarification on any necessary details and eventually buy the loan.
Freddie Mac and Fannie Mae package these loans together to create mortgage-backed securities (MBSs), which are then sold to investors. Investors rely on MBSs as a consistent source of income (provided by the mortgage holders’ monthly payments). MBSs are somewhat like mutual or exchange-traded funds: Each may contain a large number of loans, sometimes as many as 1,000.
This consistent stream of MBS results in the establishment of a secondary mortgage market, fostering a continuous demand for fresh mortgages.
Conforming loan limits and rules
A mortgage must abide by certain standards to be considered conforming and eligible for Fannie Mae and Freddie Mac to purchase. These requirements include:
Loan limit – 2023’s limits are $726,200 for a single-family home in most markets, but up to $1,089,300 in higher-cost areas. (In 2024, the limit jumps to $766,550 in most areas and $1,149,825 in high-cost regions.)
Borrower credit score – At least 620
Borrower debt ratios – Ideally, a debt-to-income (DTI) ratio of 36 percent or less, though it can go up to 50 percent with specific compensating factors
Down payment/home equity – At least 3 percent down for a purchase or 5 percent equity for a refinance. However, if you put down less than 20 percent or have less than that in equity, you’ll need to pay private mortgage insurance (PMI) and will have a higher interest rate.
Loan-to-value (LTV) ratio – As high as 97 percent, depending on the mortgage and the borrower
Learn more: Conforming loan limits in 2023
How the FHFA regulates conforming loans
The FHFA compares the increase or decrease in the average house price from October to October every year, as indicated by the Housing Price Index. It uses this percentage change as the basis to adjust loan limits. This method ensures that the loan limits reflect the current housing market and allows buyers continued access to conforming mortgages.
Pros and cons of conforming loans
Pros
Low down payment: For conforming loans, the minimum down payment is 3 percent. This is much lower than a non-conforming jumbo loan, which is usually 10 to 20 percent.
More readily available: Conforming loans are some of the most popular mortgage products available. That means you’ll have many different lenders to choose from. Plus, since the process is standardized, you may be able to close on your home quicker and easier with a conforming loan.
You can avoid mortgage insurance: If you put at least 20 percent down on a conventional conforming loan, you won’t need to pay for private mortgage insurance. Even if you don’t put 20 percent down, you can have PMI removed once you have 20 percent equity. The average cost of PMI is 0.46 percent to 1.5 percent of the loan amount per month, according to an analysis by the Urban Institute, so this cost can be significant.
Cons
Borrowing limits: The home you want to buy could exceed conforming loan limits, especially if you’re in a higher-priced market.
Higher credit score needed: You need a credit score of 620 or higher for a conventional conforming loan, whereas some government loans can be had for a score as low as 500.
Limits on debts: Your DTI ratio must meet conforming loan standards set by the FHFA. The maximum DTI ratio is typically 36 percent. Sometimes, that can stretch to 43 percent or even 50 percent if you have other “compensating factors,” such as a higher credit score.
Conforming vs. non-conforming loans
A conforming loan conforms to the FHFA’s standards pertaining to the borrower’s credit, down payment and loan size. Fannie Mae and Freddie Mac will only purchase conforming conventional loans. A non-conforming loan doesn’t conform to these standards, so Fannie and Freddie won’t buy it from the lender.
The fact that a loan is non-conforming doesn’t mean it’s bad, however. It simply means that it doesn’t meet the criteria for purchase by the government-sponsored enterprises. You may need a non-conforming jumbo loan, for example, to purchase a home that exceeds the conforming loan limit for that area.
Additionally, some mortgage lenders offer nonconforming loan options tailored to borrowers with credit challenges or sketchy histories — like a bankruptcy in their recent past. The lender has more leeway in approving applicants, since it doesn’t have to meet the federal standards.
Of course, it has more leeway in setting fees, terms and other conditions, too. Nonconforming loans often charge higher interest rates than conforming loans, or impose more fees.
Conforming vs. conventional loans
Both conforming loans and conventional loans refer to private (non-government) and commercial mortgage loans. And their meanings overlap.
But “conventional loan” is a broader category. A conforming loan is one that meets specific criteria set by the FHFA, including conforming loan limits. A conventional loan is any loan that isn’t guaranteed or insured by the government (FHA, VA and USDA loans). Conventional loans can be either conforming or non-conforming.
In short: All conforming loans are conventional loans, but not all conventional loans are conforming loans.
How to get the best conforming loan for you
There are several steps you can take to help you get the best conforming loan for your circumstances:
1. Check your credit report
As far in advance as possible, check your credit report and history at AnnualCreditReport.com. Check your reports carefully for out-of-date items and factual errors. Dispute any errors you spot, because even minor issues can result in a lower credit score.
2. Get your documents in order
Get your paperwork together so you’re prepared for the mortgage application process. Lenders can now get a lot of information directly from banks and the IRS, but it’s still a good idea to have documents like payroll stubs, bank statements, retirement accounts, W-2 forms and tax returns handy.
3. Compare loan rates
Take the time to compare mortgage offers from at least three different lenders. Consider your needs and preferences when creating a short list of lenders to work with. You might want to start with your bank (if it offers mortgages), or consider a credit union or online lender, for example. Beyond the general terms of the loan, look closely at each lender’s fees and points.
Different lenders have different financing products available. Also, the same sort of loan’s terms may vary, depending on your creditworthiness.
You can find conforming loan rates through Bankrate, which provides mortgage rates for both 30-year and 15-year loans daily. When comparing mortgage rates, consider the following:
If you think interest rates will rise in the coming month or so, you might choose to lock your rate to ensure the lowest rate possible.
Interest rates may differ depending on your credentials as a borrower. Beware of rates that seem too low to be true given your financial position. If you do encounter a low rate, it could be that its percentage will be offset by bigger upfront costs. Be sure to evaluate the complete cost of the loan (interest rate and fees) carefully, as indicated by its annual percentage rate (APR).
Remember that you can get either a fixed- or adjustable-rate mortgage. A fixed-rate mortgage generally ranges from 10 to 30 years, and the interest rate remains the same for the life of the loan. With an adjustable-rate mortgage, your interest rate stays fixed for an introductory period, usually for 3 to 10 years, and is typically lower than fixed-rate loans. After that period, the rate will fluctuate based on market factors.
4. Get preapproved
Once you find a lender you’re interested in working with, you can get preapproved for a loan. Preapproval can help expedite the financing process and uncover any issues related to your credit before they show up when you formally apply for a mortgage. Getting preapproved also helps demonstrate to a home seller that you’re a serious buyer.
5. Avoid excessive spending
Lenders will keep a close eye on your credit and spending right up until your mortgage closing date. Think of the time between when you apply for a loan and when you close as a “quiet” period, when you spend as little as possible. While your mortgage application is processing, don’t apply for any new credit, such as a credit card or personal loan, and avoid unneeded large purchases. This will help ensure the closing process goes smoothly and you receive the financing you’re expecting.
Conforming loans FAQ
Conforming loan limits are set annually by the FHFA to account for housing market changes. By adjusting their baseline loan limit, the FHFA allows average homebuyers to secure a conforming conventional mortgage despite rising housing costs.
For 2023, the FHFA raised the baseline conforming loan limit to $726,200. In higher-cost regions, the limit is even higher — up to $1,089,300. This adjustment is part of the FHFA’s initiatives to support accessibility to mortgages for average buyers. For 2024, those limits jump to $766,550 in most areas and to $1,149,825 in pricey regions.
Unfortunately, one of the immovable standards for conforming loans is the loan limit — you can only borrow so much and no more. One workaround is a piggyback loan, in which you get a smaller mortgage atop a larger one: Together, they add up to enough to finance the home.
A conforming loan can have a lower down payment as long as the borrower pays private mortgage insurance (PMI). By paying for PMI, you can get a conforming loan with as little as 3 percent down if you have a Conventional 97, Fannie Mae HomeReady or a Freddie Mac HomeOne or Home Possible mortgage.
To qualify you for a conforming loan, lenders evaluate your debt ratios. There are two debt ratio measures, sometimes expressed as 28/36: the front-end and back-end. The front-end ratio measures how much of your gross monthly income is allocated to your mortgage, including the monthly payment (principal and interest), property taxes, insurance and HOA fees (if applicable). Typically, lenders look for a front-end ratio of 28 percent or less. The back-end ratio, also called the debt-to-income (DTI) ratio, includes the front-end ratio plus other monthly debt obligations, such as an auto loan, student debt, personal loan and credit card payments. (To derive your DTI, use this handy calculator). For conforming loan consideration, the maximum back-end ratio is 36 percent. It’s possible to get a conforming loan with higher debt ratios, but lower is generally better for both borrower and lender.
While FICO and VantageScore take some of the same factors into account, VantageScore determines your credit score based on six different factors. Let’s look at how VantageScore weighs each factor:
Payment history (41%): Your past ability to pay bills on time.
Depth of credit (20%): The ages and types of credit accounts you have.
Credit utilization (20%): How much of your credit limit you’re using.
Recent credit (11%): The number of hard inquiries on your credit report.
Balances (6%): The total balances on your credit accounts.
Available credit (2%): The amount of credit you have available to you.
What Kind of Loan Can I Get With a 720 Credit Score?
As mentioned above, a good credit score can help you qualify for better rates and terms for loans. However, it’s important to keep in mind that your credit score isn’t the only factor that lenders look at when reviewing your loan application. Your income, employment, credit history, and debt-to-income ratio are also taken into consideration during the approval process.
With that in mind, here’s a look into the loans you can generally expect to qualify for with a 720 credit score. Assuming you also qualify for income thresholds as well.
Mortgages
Generally, mortgage lenders require a minimum credit score of 620, so you should have no problem qualifying for a mortgage with a 720 credit score. You’ll also likely qualify for low interest rates, although you might not get the best rate available. Borrowers who qualify for the lowest interest rates typically have a 760 credit score or higher.
Additionally, how much of a down payment you put down may influence your interest rates. A larger down payment provides less risk to the lender because you have additional stake in the house.
Auto Loans
A 720 credit score will allow you to qualify for an auto loan. When looking at the average car loan interest rates, borrowers with credit scores between 661 and 780 qualify for an average used car APR of 7.83% and an average new car APR of 5.82%. However, if you bring your score to 781 or above, you can expect a 1.84% lower interest rate for used cars and a 1.07% lower interest rate for new cars, on average.
Personal Loans
With a 720 credit score, you’ll have many options for personal loans, so you should shop around for the best rates. Personal loan interest rates can range from 6% to 36%, although a good credit score should allow you to qualify for rates on the lower end of that spectrum. According to recent personal loan statistics, the average interest rate is 11.2%.
Student Loans
While federal student loans don’t have credit score requirements, private student loan lenders typically require a good credit score. With a 720 score, you’ll likely get approved by most lenders and may even qualify for the best interest rates.
Credit Cards
Most credit card issuers will approve borrowers with a 720 credit score and potentially offer the lowest interest rates. You can likely even get approved for a 0% APR card. Keep in mind that certain prestigious credit cards that provide luxurious perks require excellent credit to qualify plus additional requirements. Therefore, you may need to improve your credit score before applying for an exclusive credit card.
How to Further Improve Your 720 Credit Score
If you have a good credit score but want to reach the very good or excellent range, here are some tips for how to make your good credit score even better:
Pay your bills on time: Since 720 is a high credit score, a single late payment can cause a significant drop in points. Make sure to continue paying your bills on time to further improve your credit.
Make payments more frequently: Making multiple payments on your credit card bill each month can help keep your credit utilization low.
Request a credit limit increase: Another way to lower your credit utilization is to increase your credit limit.
Leave credit accounts open: Avoid closing old credit accounts to maintain the length of your credit history.
Space out new credit applications: Wait six months between credit card applications to limit the number of hard inquiries on your credit report.
Get credit for rent and utility payments: If you regularly pay your bills on time, a rent and utility reporting service can report your payments to the credit bureaus, which may help improve your credit.
Dispute any errors: Check your credit report at least once a year and challenge any inaccurate information you find.
While a 720 credit score is considered good, there’s still room for you to stay on top of your credit—that’s where ExtraCredit® comes in. ExtraCredit is a credit management product that helps you check your FICO® scores, view your credit reports from all three credit bureaus, report rent and utilities, and more. Start your free trial* today.
*Your 7-day trial will begin after agreeing to these terms and submitting your ExtraCredit® sign-up. After your trial period, your subscription will automatically continue on the same day every month as the day you started your trial membership. The free trial is available for new ExtraCredit customers only. The credit card you provided will be charged $24.99 (plus any applicable tax) on the next business day and monthly; after your trial period unless you cancel. You may cancel at any time by downgrading your service level in your settings or by contacting us at [email protected]. Dishonored payments will result in an automatic downgrade to the free credit.com product.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations.
If you’re interested in investing in a new vehicle, it’s not always easy to know what’s in your price range. Understanding your options and learning how to calculate your budget can determine what you can afford.
Discover how auto loans can enhance your ability to afford a range of vehicles, from brand-new cars to those with some mileage.
How to Calculate How Much Car You Can Afford
Calculating how much you can afford for your new car is a helpful step in saving money when you’re ready to make the purchase. Follow the next steps to calculate your budget effectively.
1. Calculate Your Car Payment Budget
There are two main expenses to consider when calculating your car payment budget: your down payment and your monthly payment.
Above is an example of how to calculate your monthly payment calculation. Let’s say you have a net monthly income of $4,500. Multiply your income by 0.10, or take 10% of your income. This number will be your estimated monthly payment. In this example, it would be $450.
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Monthly payment: We recommend spending no more than 10% of your monthly net (take-home) income on your monthly car payment. This doesn’t include other expenses like gas and maintenance. Round up to 15% to include all vehicle expenses.
Down payment: If you plan on purchasing a car, we recommend putting around 20% of the vehicle’s purchase price toward your down payment. The more you put down, the lower your auto loan will be.
2. Determine Which Auto Loan You Qualify For
You now have a better idea of how much you can potentially borrow based on your budget.
Several determining factors affect how much you can borrow, including:
Credit score: This will influence the annual percentage rate (APR) of the loan. Higher FICO® credit scores between 661 and 850 can lower your auto loan interest rate.
New vs. used: Auto loans for new cars typically come with reduced APRs.
Loan term: This is how long you’ll be repaying your auto loan. The average car loan term ranges between five and six years.
If you already have an auto loan, you can refinance and customize your loan with Credit.com. Try out our Auto Loan Calculator to simulate your current payment and find out what savings you can earn today.
3. Estimate Auto Insurance Cost
You should also factor in car insurance when considering purchasing a new vehicle. Factors like the make and model of the car, your driving history, and where you live can impact your insurance costs. Reach out to several insurance companies for quotes and get a clearer picture of what you’ll likely need to budget for insurance.
4. Calculate Your Purchase Price
It’s important to note your auto loan isn’t the total price you’re going to pay for your vehicle. There are other hidden costs you should be aware of beyond the number on the price sticker. Take note of these common additional costs:
Sales tax: This can be around 5% to 10% and may include local, county, and state taxes. However, not all states have sales tax, such as Montana and Oregon.
Documentation fees: These can range from $100 to $400, depending on your state.
Registration fees: These can range from $8 to $225, depending on the state.
What Car Options Do You Have?
You never want to put yourself in a financially vulnerable position if you can avoid it. That’s why it’s important to consider all of your purchasing options. Keep reading to understand how buying versus leasing can help you afford a car.
New Vehicle
Everyone wants a shiny new car, but it’s not always affordable. If there’s a particular type of vehicle you want, do some research to determine the vehicle’s current market value. That way, you’ll know exactly how much that car is worth and avoid purchasing a vehicle with an inflated price tag.
Used Vehicle
Purchasing a used vehicle can be the best route for those with a lower budget. Used vehicles tend to have considerably reduced prices compared to brand-new cars, leading to more affordable monthly payments. Additionally, used cars typically have lower car insurance costs.
Leased Vehicle
Leasing a car can be a great option for those who want a brand-new car, but would prefer lower monthly payments. There are drawbacks to this option, however, as the payments that go toward the vehicle don’t provide value and there are mileage limits. But if you don’t mind those drawbacks and like to try out different cars every couple of years, leasing is worth considering.
FAQ
Here are answers to some frequently asked questions about car affordability and monthly payments.
How Much Car Can I Afford Based on My Salary?
Determining your car affordability based on your net income is one way of estimating how much car you can afford. You should put 10% or less of your monthly income toward your car payments.
Annual Income
Monthly Car Payment Maximum
$30,000
$250
$40,000
$334
$50,000
$416
$60,000
$500
$70,000
$584
$80,000
$667
$90,000
$750
$100,000
$833
However, this doesn’t include costs such as fuel, parking, and maintenance. You can plan on dedicating about 15% of your monthly income to total vehicle expenses.
How Much Should My Monthly Car Payment Be?
Your monthly car payment will depend on a few factors, such as your auto loan interest rate, loan term, and how much you put toward your down payment. Your choice of vehicle and where you purchase it can also affect interest rates.
However, your monthly car payment should be around 10% or less of your monthly take-home pay. You can always choose to pay more every month to pay your auto loan quicker and save money on interest.
Shop for Auto Loans With Credit.com
Take your first step toward vehicle ownership by learning more about credit scores with Credit.com. Get your free credit report card today.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Bankruptcy is a legal process that individuals and businesses can undertake to eliminate their debts under the oversight of a bankruptcy court.
Bankruptcy is a legal process that individuals and businesses can undertake to eliminate all or part of their debts under the oversight of a bankruptcy court. For individuals who have amassed debt beyond what they can reasonably pay, bankruptcy is a potential path toward a clean slate.
There are different types of bankruptcy, important terms to know and significant consequences to watch out for. If you’re wondering, “What is bankruptcy?” or you’re considering it for yourself, read on to get an overview, or you can use the links below to jump to a specific question.
How does bankruptcy work?
Bankruptcy is a complicated legal process that involves several steps:
A debtor files a legal petition for bankruptcy in federal bankruptcy court.
The court appoints a trustee to oversee the case.
The trustee examines the debtor’s assets and liabilities and determines if they have any assets which can be administered by the trustee.
While it’s technically possible to file for bankruptcy on your own, working with a qualified attorney is recommended, as the amount of legal knowledge required is beyond what the average person possesses.
During the creditor’s meeting the trustee will examine the debtor and the case and file a report. What happens next depends on whether you filed for Chapter 7 or Chapter 13. In both cases, your debt can be discharged, but the process for achieving that end varies.
What are the different types of bankruptcy?
For individuals, the two most common forms of bankruptcy are Chapter 7 and Chapter 13. Businesses and local governments can also file for bankruptcy, but we won’t cover those types of bankruptcy in detail in this article.
Chapter 7
Chapter 7 bankruptcy is the most straightforward approach to filing for bankruptcy. Chapter 7 bankruptcy, also called liquidation bankruptcy or fresh start bankruptcy, sometimes involves the sale of assets to pay off debt. In most cases a debtor’s assets are exempt and no assets need be sold. This is best for debtors who have no way to repay their debt.
When a debtor files for Chapter 7 bankruptcy, the following process takes place:
The debtor provides the trustee with tax returns and other financial documents relevant to the case, plus a list of all their assets.
The trustee evaluates the assets to determine which assets, if any, are nonexempt.
The trustee sells all nonexempt assets to pay off creditors. Debtors can keep exempt property, which varies by state law. For example, in New York, a debtor can keep their car if they own it outright and it is worth $4,000 or less.
The debtor meets with their trustee and creditors at a Meeting of Creditors, also called a 341 Hearing, to verify the information they’ve filed in their bankruptcy petition is accurate.
The trustee might pay some of the debt using the proceeds from liquidating the debtor’s nonexempt assets. However, this is rare.
Any remaining debt is discharged. However, Chapter 7 does not eliminate all debt—debtors are still responsible for paying court-order alimony and child support, student loans and certain taxes.
The Chapter 7 process typically takes about four to five months from filing to final discharge of debt.
While Chapter 7 bankruptcy has powerful effects on debt, it also has consequences. The negative item from bankruptcy can remain on a credit report for 10 years.
A debtor can only file for this kind of bankruptcy once every eight years. For that reason, a condition of bankruptcy is always credit counseling and personal finance courses, which are aimed at supporting people to prevent them from ending up in the same financial situation again.
Chapter 13
Chapter 13 bankruptcy still leads to debt elimination, but it involves a debt payment plan. In Chapter 13 bankruptcy, debtors keep their property and pay debts over an agreed-upon period, usually three to five years. To qualify, a debtor must prove they have regular income. During the payment period, creditors are legally prohibited from collection efforts against the debtor. This type of bankruptcy is best for debtors who have steady income but still can’t afford to pay their debts in full.
If a debtor files a petition for Chapter 13 bankruptcy, the following will occur:
The court reviews the repayment plan. Typically, repayment plans last three to five years and may repay some or all of the debt owed. The debtor prepares and files the plan and creditors have a chance to comment on it, the trustee comments on it and the court makes a final determination as to whether to approve the plan.
A court-appointed trustee collects your payments. Over the course of repayment, a trustee will collect funds and disburse them to creditors.
After repayment, the bankruptcy is discharged. After the specified repayment period, the debtor becomes eligible for a discharge. If the debtor has complied with the trustee’s requests, has paid all required payments and takes a financial management course, then the remaining balance on debt (if any) is forgiven.
The entire Chapter 13 bankruptcy process can take up to five years from the filing date to the end of repayment.
While Chapter 13 bankruptcy also has detrimental consequences for credit and general financial health, it tends to be less detrimental than Chapter 7 bankruptcy.
Additionally, Chapter 13 bankruptcy remains on a credit report for just seven years, and the process can be repeated more often if necessary. Having debt discharged or reorganized can be a vital financial tool.
Other types of bankruptcy
While individuals file Chapter 7 and Chapter 13 depending on their circumstances, there are other types of bankruptcy that farmers and fishermen, businesses and city governments can use in difficult financial situations.
Here’s a quick overview of other forms of bankruptcy:
Chapter 9 focuses on local governments and school districts that need to restructure debt in the wake of financial troubles. Similarly to Chapter 13, Chapter 9 utilizes a debt repayment plan.
Chapter 11 enables businesses to create a debt repayment plan in conjunction with a revised business plan that is aimed at increasing profitability.
Chapter 12 is a narrowly focused form of bankruptcy that is exclusive to family farmers and fishers hoping to avoid liquidation.
Chapter 15 is an international provision that helps mediate bankruptcy proceedings that involve the United States and at least one other country.
While all of these forms of bankruptcy are useful, only Chapter 7, Chapter 11 and Chapter 13 typically directly affect individuals in financial distress.
What does it mean when bankruptcy is discharged?
A bankruptcy discharge means a debtor is no longer personally responsible for certain debts. Regardless of the remaining balance of a previous debt, once a bankruptcy discharge is entered, creditors can no longer collect on the debt.
With Chapter 7 bankruptcy, discharge usually occurs after the creditor’s meeting. There is typically a 60-day window after the meeting of creditors for creditors to file complaints, after which the discharge may take effect.
With Chapter 13 bankruptcy, discharge typically takes place after the repayment plan is completed.
However, not all debts are eligible for bankruptcy discharge. Depending on the type of bankruptcy filed, the following debts may not be discharged:
Alimony
Child support
Tax liens
Some federal, state and local taxes (depending on the age of the debt)
Student Loans.
Debts for willful and malicious injury to a person or property
Debts for death or personal injury caused by the debtor driving while under the influence of alcohol or drugs
Any debt not listed in the bankruptcy filing
In general, a discharged bankruptcy is permanent, meaning creditors no longer have any claim to previous debt. In some cases, however, a bankruptcy discharge could be revoked if the party proves to the court that the initial petition was made fraudulently. The time period for taking an action in this way is limited to one year after discharge.
What is the benefit of filing for bankruptcy?
There are advantages to filing for bankruptcy for individuals who can no longer deal with overwhelming debt.
Some of the most important benefits of bankruptcy include:
The elimination of many types of debt
A fresh start with finances
An end to calls and letters from collection agencies
Relief from wage garnishment, foreclosure or repossession
Protection of certain kinds of property
Bankruptcy courts exist for a reason, and bankruptcy serves an important financial function for many individuals whose debts significantly exceed their ability to repay. For those who have no other good options, bankruptcy provides important benefits and the chance for relief and a second chance at financial security.
How does bankruptcy affect your credit score?
Bankruptcy has a serious detrimental effect on your credit, though it is possible to rebuild credit after bankruptcy.
The negative item from bankruptcy will remain on your report for seven to ten years, depending on the type of bankruptcy. Any time you apply for credit, that negative item will be visible to creditors, who will factor it in when deciding whether to approve your application.
For those looking to rebuild credit after bankruptcy, a secured credit card is often the best starting point. A secured credit card is backed by a deposit, so creditors are usually willing to provide it even to those who have a bankruptcy on their record. Responsibly using the card and making payments on time can slowly lead to improved credit in the future.
Additionally, many people who have gone through bankruptcy choose to work with a credit repair company, which may be able to support the process of rebuilding credit.
What is bankruptcy fraud?
Bankruptcy fraud occurs when an individual withholds information about debts or assets from the federal bankruptcy court. In both Chapter 7 and Chapter 13 bankruptcy, information about your finances determines how your debt is handled, so providing false or misleading information could lead to a revocation of your bankruptcy discharge or criminal charges.
Here are some examples of bankruptcy fraud:
Hiding assets. During bankruptcy, you are forced to disclose all of your assets, which may be sold in order to pay creditors. Withholding information about your assets to try to protect them is not allowed.
Running up debt prior to discharge. If you use credit to purchase property or items with no intention of repayment simply because you believe the debt will be discharged, you are likely committing bankruptcy fraud.
Falsifying documents. Providing false information about property transfers, debts, assets or any other necessary information is forbidden during bankruptcy proceedings.
The consequences of bankruptcy fraud can be serious, especially if a party proves to the court that your efforts were intended to deceive creditors and prevent them from receiving their just payment. You could be denied a bankruptcy discharge. Fines and even prison time are possible outcomes for bankruptcy fraud, so it’s important to be truthful throughout the entire process.
Bankruptcy terms you should know
A bankruptcy score is used by financial institutions to predict the likelihood that an individual will file for bankruptcy within a certain period of time. Similar to credit scores, bankruptcy scores are calculated using a wide variety of factors. Unlike credit scores, however, bankruptcy scores are not available to consumers, so you can’t know your own score or make efforts to improve it directly.
Still, regardless of your bankruptcy score, the same financial habits that support a strong credit score are also likely to help prevent you from needing to file for bankruptcy:
Create and maintain a budget. Spending within your means and prioritizing essential expenses is an excellent way to maintain financial health.
Make full and on-time debt payments. Make timely payments for loans and credit cards, and avoid keeping a credit card balance from month to month.
Avoid unnecessary lines of credit. While credit is a valuable tool, it’s important to avoid opening too many lines of credit and letting debt become overwhelming.
Bankruptcy scores are important tools for financial institutions making lending decisions, but they are largely unimportant to consumers. As long as you are making wise financial decisions over time, creditors will continue to recognize your efforts and your risk of bankruptcy will remain low.
Bankruptcy terms you should know
As you navigate bankruptcy, you’ll come across a variety of terms that may be unfamiliar. Understanding all of these terms makes navigating the process of bankruptcy much easier, and fortunately, none of them are difficult to understand.
Here’s a list of terms that you should know if you’re trying to understand bankruptcy better.
Assets and liabilities: An asset is anything you own, whereas a liability is anything you owe.
Chapter: A chapter is simply the specific type of bankruptcy being declared under Title 11 of the United States Federal Bankruptcy Code.
Discharge: A discharge means the associated dischargeable debts no longer need to be paid.
Lien: A lien is a claim against a piece of property from a creditor who is owed a debt, such as a mortgage lender or a car creditor.
Liquidation: Liquidation is the process of selling assets, usually to pay debts—for instance after filing Chapter 7.
Means test: The means test is used to determine who is eligible to file for Chapter 7 by accounting for income and debt.
Repayment plan: An approved repayment plan is a court-authorized plan to give creditors back some or all of what they are owed. At the completion of a repayment plan under Chapter 13, remaining dischargeable debt is typically forgiven.
Secured and unsecured debt: A secured debt has some sort of valuable property as collateral—for instance, an auto loan is secured by the car itself. An unsecured debt has no associated collateral—for instance, a credit card is unsecured.
Trustee: Appointed by the court, the trustee is responsible for reviewing the debtor’s financial situation and documentation relation thereto, conducting the meeting of creditors and collecting and liquidating non-exempt assets or ensuring payments are made according to the repayment plan.
Armed with knowledge of these terms, you’ll have a much greater understanding of bankruptcy moving forward.
What does it cost to file for bankruptcy?
The cost to file bankruptcy can be broken down into two parts: court fees and attorney fees. According to the U.S. Court, you’ll pay a $78 administrative fee and a $15 trustee fee to file for Chapter 7 or Chapter 13 bankruptcy, plus any additional relevant fees. The total filing cost is generally under $500.
If a debtor cannot pay the fees associated with filing for bankruptcy, the court may break the fee payment into up to four installments or waive them altogether. Debtors who wish to have the fee waived must submit Form 103B. Bankruptcy filing fees are not typically waived, even for the most destitute.
That said, most people will also require an attorney for bankruptcy proceedings, and fees can vary significantly. According to All Law, fees for Chapter 7 typically range from $1,000 to $3,500, whereas fees for Chapter 13 are a bit higher, ranging from $2,500 to $6,000. Depending on your location, fees may be lower or higher, so you’ll want to consult a local lawyer to determine a more accurate cost before proceeding.
Should you declare bankruptcy?
Deciding whether or not to declare bankruptcy can be difficult, so make sure you think about all of the alternatives first. People often consider bankruptcy due to unexpected or overwhelming debt—like a medical bill that has ballooned through interest or a handful of loans that have become unmanageable.
There may be ways to deal with these debts before resorting to bankruptcy. For example:
Negotiate with your creditors. Ultimately, creditors are looking for you to repay your debt. By contacting your creditors, you may be able to work out a favorable payment plan or have some of your debt erased in order to make it more manageable.
Get a debt consolidation loan. A debt consolidation loan enables you to simplify and often reduce your debt payments by lowering your interest rate or extending your payment timeline.
Work with a credit counselor. A credit counselor may be able to help you evaluate your entire financial picture and create an action plan to make debt more approachable.
Still, even after these alternatives, there are some people for whom bankruptcy is the best available option. If you have no means to pay back your debts and you’ve exhausted other options, contact a bankruptcy attorney to determine your best next steps.
Overall, bankruptcy exists to protect individuals from long-term financial ruin. Though the credit consequences of bankruptcy are long-lasting, the benefits of freedom from debt are absolutely essential in some cases.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Vince R. Mayr
Supervising Attorney of Bankruptcies
Vince has considerable expertise in the field of bankruptcy law.
He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.
Whether you’re a first-time homebuyer or a seasoned homeowner, there’s no denying that purchasing a home is a huge financial decision.
You’ll likely have to make a down payment and commit to a monthly mortgage payment for 30 years (unless you decide to sell before then). Even so, the obligation should not be taken lightly.
Just from preparing to buy a home, you know that your credit score is an incredibly important number. It determines your eligibility for a home loan, and also plays a major role in determining your interest rate.
The higher your credit score is, the lower your interest rate will be, which can really affect your monthly payment. Hopefully, yours is in top shape when it’s time to buy. However, it’s also important to consider what happens to your credit score after you actually purchase your home.
You might be surprised to find out that buying a home has both positive and negative impacts on your credit scores. Read on to find out exactly what to expect of your credit score when you get a mortgage. We’ll also teach you how to minimize any potential damage that could occur.
How Applying for a Mortgage Affects Your Credit Score
It’s smart to shop around for interest rates from different lenders when you’re looking for a mortgage. Interest rates can vary greatly depending on the lending company and the type of mortgage loan they offer you. However, it’s essential to employ the proper strategy when comparing those offers.
That’s because each time you apply for new credit, whether it’s a mortgage, auto loan, or credit card, a credit inquiry appears on your report. Your credit score drops anywhere between five and ten points.
Unfortunately, if you have an excessive number of credit inquiries, mortgage lenders may think you’re desperate for cash and be reluctant to lend to you. The dip in your credit score reflects this potential risk.
The Benefits of Mortgage Pre-Approval on Credit
So, how can you mitigate this issue when shopping for a mortgage? First, limit the number of lenders you apply to. You can also ask for a pre-approval to find out what interest rates you’d be eligible for. The difference is that there is not a hard credit check performed. Instead, the mortgage lender only does a soft pull, which doesn’t have any effect at all.
You’ll still have to go through the formal application (and hard credit pull) once you decide on a mortgage loan. However, the preapproval process gives you the opportunity to compare offers without any type of commitment.
Multiple Credit Inquiries for the Same Type of Loan
Another way to protect your credit scores from too many inquiries is to limit your loan search to two weeks. When evaluating your credit history, credit reporting agencies realize that consumers want to shop around for different rates to get the best loan. So, if you have several of the same types of inquiries listed in a two-week span, they’ll only be counted as a single inquiry.
Mark your calendar with the first date of your loan application so you can track how long your search has lasted. This will help you keep your credit scores intact. Plus, you’ll also keep yourself on schedule for getting your mortgage in order.
The Effect of Mortgage Debt on Your Financial Profile
Your credit score could also take a hit because of the amount of mortgage debt you have, especially if this is your first time owning a home. Luckily, there is a good side and a bad side to this.
Let’s start with the negative. Since a home costs so much, your level of debt is going to skyrocket. This is true, especially if you’re a first-time homebuyer or someone who just upgraded to a more expensive home.
Think about it: Say your previous levels of debt included a small credit card balance, a student loan, and a car payment, and that came to about $65,000 in debt. If you buy a $200,000 house, you’re nearly quadrupling your level of debt.
Yes, you were approved for the home loan and can afford the monthly mortgage payments. However, that is still a significant number to be added to your credit reports, and your credit history will reflect this change. It’s not going to plummet by any means, but you will notice a decrease.
How Your Mortgage Affects Debt-to-Income Ratios
Another way your new mortgage can influence your access to credit is through your debt-to-income ratio. This isn’t part of your credit score, but it is part of how future lenders analyze your application for credit. Basically, your DTI is how much monthly debt payments you owe versus how much money you earn each month.
Rent isn’t included in your DTI, but mortgages are. So, the next time you go to apply for a car loan or refinance your mortgage, you’ll have to consider how much overall debt you pay each month compared to your pre-tax earnings.
The Positive Impact of Timely Mortgage Payments on Credit
Now let’s get into the positive effects that buying a home can have on your credit score. The first impact is that your credit mix becomes more varied.
This category actually accounts for 10% of your credit score. Therefore, having an installment loan like a mortgage helps more than just having revolving credit like a credit card. 10% may not seem like a lot, but it can help offset some damage caused by the negative side of purchasing a home.
The most important thing you can do to increase your credit score is to pay all of your bills on time. And having a mortgage is a great way to add positive history to your credit report. That’s because while most creditors report negative payments to the three major credit bureaus, many don’t actually report positive payments. So, you’re penalized for negative behavior, but sadly, not rewarded for good behavior.
Mortgage payments, on the other hand, are regularly reported to each of the three credit bureaus: Equifax, Experian, and TransUnion. And since 35% of your credit score is determined by your payment history, on-time payments each month can make a significant difference.
Strategies to Maintain a Strong Credit Score After Buying a Home
Even after you’ve purchased your home, it’s still essential to keep your credit scores in top shape. You never know when you’ll need credit again, and you’ll want to ensure you have access to the best rates. Even if you’re not planning to use new credit for a car loan or personal loan.
You may want to refinance your mortgage in a few years to get a better interest rate, cash out some equity, or take off your mortgage insurance. To do any of those things, you’ll continue to need a strong credit history. Follow these tips to ensure your credit score stays where you want it to be.
#1: Monitor your credit report annually.
You can get free copies of your credit reports each year from AnnualCreditReport.com. This is helpful in several ways. First, it allows you to check to make sure all of your personal and financial information is listed accurately.
More importantly, however, is that it allows you to detect whether someone has fraudulently opened up any type of credit account in your name. Identity theft is a growing concern. Staying on top of your credit history keeps your identity and your finances safe.
#2: Continue to make your payments on time.
It’s vital to your credit history to make timely payments. Even one 30-day late payment can stay on your credit report for years, causing a major drop in your credit score. And the consequences just get worse as the delinquency ages to 60 and 90 days.
It’s easy to get swept away by all the new excitement and responsibilities that come with a new house. Just be sure to keep up with your other financial obligations during that time.
#3: Keep your debt low.
Since you just added a large new mortgage to your credit report, it’s wise to keep your other debts as low as possible, particularly your credit card balances. Try not to exceed 30% of your available balance on any of your cards. If you do, your credit score is likely to fall. Instead, try to spread out your balances across cards while you work on paying them off.
Buying a house does indeed impact your credit score. However, the impact is not so dramatic that buying a house isn’t worth it. After all, the purpose of the credit score itself is to help prove your creditworthiness to lenders so you can borrow money when the need arises.
As long as you can afford your monthly payments, purchasing a house could very well be a wise investment. It allows you to put down roots while growing equity in your home.
Bottom Line
Purchasing a home is a significant financial milestone that can affect your credit in various ways. While it might initially lower your credit score due to inquiries and increased debt levels, it also offers an opportunity to build and improve your credit over time through regular mortgage payments.
The key is to manage your debt-to-income ratio effectively and to maintain good credit habits. This includes monitoring your credit report, keeping debt levels under control, and ensuring timely payments. By doing so, you can enjoy the benefits of homeownership while nurturing a strong financial standing.
In summary, buying a house is more than acquiring property; it’s a strategic step in building a secure financial future. With thoughtful management, the journey to homeownership can enhance your credit profile and open doors to future financial opportunities.
Inside: Fixed expenses are a vital part of any budget, and understanding how to account for them is essential to staying on track. This guide will teach you about fixed expenses and how to use them in your monthly budget to keep expenses under control.
Budgeting is the cornerstone of financial stability.
Whether you want to or not, it will take away the stress of money.
A budget is a practical tool that enables you to plan your spending and savings, ensuring a fair share of your income goes towards critical expenses. It also gives you more control over your money, reducing stress and enabling you to meet your financial objectives.
This is something you want, right?
In this post, we will uncover information specifically related to fixed budget expenses.
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Decoding Your Expenses – Fixed and Variable
Understanding expenses forms the bedrock of effective budgeting practices. There are two key types of expenses to consider: fixed and variable.
Fixed expenses are those that remain constant every month, such as rent or car payments.
Variable expenses, on the other hand, fluctuate monthly based on usage or consumption, like groceries, utilities, or gas.
Balancing these two types of expenses forms a significant part of personal budgeting.
What is A Fixed Expense?
A fixed expense is a cost that remains typically constant and is paid at regular intervals. These intervals may be weekly, monthly, quarterly, or annually.
Given their consistency, they contribute to financial predictability and ease of budgeting.
What is an Example of a Fixed Expense?
Here are common fixed expense examples that cover a wide spectrum but predominantly include costs required to maintain a basic standard of living. Here are some examples:
Rent or mortgage payments: This encompasses the regular cost of housing.
Insurance premiums: This could be for your car, health, life, renters, or homeowners insurance.
Loan payments: Regular installments for obligations like student loans and car loans belong to this category.
Utilities: Though they may fluctuate occasionally, regular payments like water, gas, and electricity are often treated as fixed costs.
Subscriptions: Recurring payments for services such as gym memberships or streaming platforms.
Savings: For disciplined budgeters, fixed contributions to saving accounts can be considered a monthly fixed expense. This is how Money Bliss readers save so much money!
The list can extend to include other less common fixed expenses, such as alimony, child support, or back tax payments, depending on personal circumstances.
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What is a periodic fixed expense?
A periodic fixed expense is a cost that is regular and predictable but does not occur monthly. These expenses still retain the characteristics of fixed expenses.
They may be caused by quarterly, semi-annual, or annual payment terms and require careful budgeting and planning. Examples include annual subscriptions, car insurance paid semi-annually, or yearly property taxes.
It’s essential to account for these expenses in your budget, dividing the total cost by the number of months until payment to ensure you’re adequately prepared when they’re due.
How to Budget for Fixed Expenses
Budgeting is a crucial financial activity as it helps manage income effectively and ensures all necessities are covered.
Most people use the zero based budget or the biweekly budget as a starting point.
1. Start With Fixed Expenses in Budgeting
Starting with fixed expenses in the budgeting process is essential, as they make up the majority of one’s budget and are typically consistent for longer periods.
When writing out your budget, prioritize fixed expenses such as housing costs, insurance, and childcare. You can use our personal budget categories to find out which expenses you shouldn’t forget.
Upon allocating your income for the month, ensure these bills take precedence over discretionary spending to avoid budgeting errors.
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2. Prioritizing Between Fixed and Variable Expenses
Prioritizing between fixed and variable expenses can often feel like walking a tightrope.
The first step is budgeting for your fixed expenses. Since they make up the majority of your budget and are for longer periods of time, it’s crucial to ensure these costs are taken care of first.
Next, plan for your variable expenses. These costs fluctuate every month and can be adjusted easily.
Finally, you will account for flexible expenses.
As always, don’t forget to save and invest, as this will help with financial sustainability and wealth development.
3. Tools and Techniques for Efficient Budgeting
Today’s digital landscape offers myriad tools and techniques for efficient budgeting, which is great news for you!
Apps and digital tools can facilitate the tracking of expenses in real-time, thus making it easier to discern patterns and identify savings opportunities. Using a line-item budget can help you dig into where your money is going and plan every dollar you earn.
Here are our favorite budget apps.
Regularly reviewing and updating your budget can help you stay on top of changes and future uncertainties.
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How do I determine whether a cost is fixed or variable?
Determining whether a cost is fixed or variable often comes down to its consistency and its correlation with a factor such as output, usage, or time.
Fixed costs remain constant over time or within certain activity levels; examples include rent and insurance premiums. They do not fluctuate with changes in production or the number of goods sold.
Variable costs, on the other hand, fluctuate in direct proportion to levels of spending, such as groceries or gas.
Understanding this difference can help with accurate cash flow forecasting and effective financial management.
Strategies to Save on Fixed Costs
Now, the key is to try to lower your fixed expenses as much as possible. This will make the biggest difference in your budget.
For example, if your rent for a one bedroom apartment is $1850, maybe you move in with a roommate, and your rent is lowered to $800 per month. That is a savings of $1050, which you can save for a down payment on a house.
Ways to Curb Fixed Expenses
Optimizing your budget often entails finding ways to reduce your fixed expenses. Several strategies can help achieve this:
Renegotiate Your Bills: Reach out to service providers to negotiate lower rates for services such as insurance premiums, Internet, phone service, and more.
Refinance Your Loans: If interest rates have decreased, consider refinancing your mortgage or student loans to lower the monthly payments.
Downsize Your Living Situation: One major way to cut costs is to find a smaller or cheaper place to live.
Cancel Unused Subscriptions: Regular payments for services you don’t use, like gym memberships or streaming platforms, can silently drain finances.
Automate Savings: Regular, automated transfers to a savings account can enforce discipline and consistency in managing money.
Remember, while these strategies can help you cut costs, each individual’s circumstances are different, so personalized considerations should be made.
Which fixed expense would be most difficult to change if money is needed for car payments?
Car payments are a real struggle for most people. Right now, the average car loan is between $516-725 per month depending on a used or new vehicle. 1
As such, your largest fixed expenses are usually the most challenging to change.
If you require more money for car payments, the most difficult expenses to alter would likely be your mortgage or rent payments. Reducing these costs often necessitates significant lifestyle changes, such as moving to a cheaper home or obtaining a roommate.
Other difficult-to-change fixed expenses could include insurance or student loan payments, depending on the terms of your loans or policies.
It’s important to have an emergency fund set up for unforeseen repairs like these to avoid having to drastically change your lifestyle.
Practical Tips for Achieving Financial Stability
Achieving financial stability often boils down to effective management and strategic planning. Here are some practical tips:
Pay Your Bills on Time: This reduces unnecessary fees and interest costs. If this is a challenge, setting up automated payments may help.
Save Regularly: Aim to set aside a certain percentage of income on a regular basis. Automated savings plans are a useful tool for this.
Prioritize Spending: Distinguish between your wants and needs to help prioritize your spending.
Get Insured: Protect yourself from large, unexpected expenses by ensuring appropriate coverage on insurance.
Stay Informed: Regular budget reviews and financial check-ups can help you stay on track and adjust your plans as necessary.
Remember, financial stability is a journey, not a one-time achievement. It requires consistency and patience. So, celebrate your small financial victories along the way!
YNAB
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Pros:
Comprehensive approach to budgeting, helping you plan monthly budgets based on your income.
Offers expert advice, making it suitable for those who require an in-depth, forward-thinking budgeting strategy.
Superior synchronization skills make it the winner in this area.
YNAB has extra features like goal setting for budgeting, shared budgeting tools for partners.
Option to manually add and upload transactions from accounts each month.
YNAB prioritizes user privacy.
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Frequently Asked Questions
Yes, rent is considered a fixed expense. It is a recurring cost that typically stays constant, regardless of changes in your income, spending, or other factors.
The rental or lease agreement specifies the monthly rent expense, which does not change until the lease period ends or is renegotiated.
If fixed costs become variable costs in a personal budget, it can add some unpredictability to your expenses. For instance, if you have a variable-rate mortgage, your payments may change due to the mortgage agreement.
To restore control, consider opening separate savings accounts for each variable expense category, turning these unpredictable expenses into ones that can be anticipated and budgeted for each month.
Fixed costs refer to expenses that do not change with fluctuations in your budget. They are incurred regularly and remain relatively constant, independent of your spending.
These costs are critical expenses necessary to live your life and cannot be quickly modified or eliminated.
Does This List of Fixed Expense Examples Help You?
In conclusion, examining and reducing your fixed expenses can be a transformative step toward achieving financial stability.
Contrary to popular belief, fixed costs are not immutable. With diligence and thoughtful consideration, you can explore cheaper alternatives for health insurance premiums, cell phone plans, and other consistent expenses.
Lowering your fixed costs enables automatic, consistent savings which can then be directed towards settling debt or securing your future. The beauty of this approach lies in its subtlety as this won’t feel like an imposition on your lifestyle.
Therefore, understanding and managing your fixed expenses can indeed play a crucial role in your journey to financial soundness.
It’s not just about making frugal decisions, rather it’s about making smart ones that can reap substantial benefits in the long run.
Now, do you have the traits needed to be financially stable?
Source
LendingTree. “Average Car Payment and Auto Loan Statistics 2023.” https://www.lendingtree.com/auto/debt-statistics/. Accessed November 27, 2023.
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With car loan debt at a new high, a report shows the impact as Americans struggle to make their auto payments: a large increase this year in the number of borrowers who are in delinquency.
Auto loan debt rose to $1.6 trillion in the third quarter of 2023, a $13 billion increase from the previous quarter, according to data from the Federal Reserve Board of New York’s report on household debt and credit for the third quarter of 2023. As well, the number of borrowers who fell more than 90 days behind on their auto loans rose to 2.53% in the third quarter of 2023 — a 25% uptick from what it was the same time last year.
Why consumers are struggling
One of the key reasons auto loan debt is at a historic high is that “car prices have increased in recent years, so consumers are taking out bigger loans and often for longer terms,” said Caleb Cook, vice president of consumer lending at Digital Federal Credit Union, via email.
Indeed, elevated car prices and soaring interest rates have made it more expensive and difficult for drivers to borrow money than it was pre-pandemic. The average price of a new car was $47,899 in September 2023. For comparison, the average new car sold for $37,590 in September 2019.
According to Cook, other increased car costs, like insurance, are making the problem worse. “The cost of car ownership has been compounded by average car insurance payments doubling to $2,000 annually compared to pre-pandemic era costs,” Cook said.
What you can do to mitigate your debt
If you’re struggling with auto loan debt, there are some steps you can take to alleviate the strain. Depending on your financial situation, here are some of your options.
Refinance your car
When you refinance a car loan, you’re getting a new loan to pay off and replace your current one. This can be a good option if you’re struggling to make auto loan payments because you can refinance to a longer loan term to reduce your monthly payments, or potentially get a lower interest rate.
Keep in mind that while refinancing to a longer loan term to lower your monthly payment can make things more manageable in the short run, it may also mean that you’ll pay more interest over the life of the loan.
A borrower will typically need a good credit score to refinance to a lower-interest loan. While it’s possible to refinance with a low credit score, it may be more difficult to get a loan with better terms than you have on your current loan — which might not make refinancing worth it for you. Consider getting a pre-qualified auto refinance offer to see what rate you might qualify for, then decide if it’s worth it. Most lenders offer pre-qualification with a soft credit check so there is no damage to your credit score.
Turn to a hardship program
Many lenders offer hardship programs that provide assistance to borrowers who can’t afford to make their loan payments.
Hardship programs typically offer assistance in the form of due-date changes, loan deferral or forbearance (which is pausing or skipping payments until a later time). They may also allow you to temporarily reduce your interest rate or payment amount.
It’s important to reach out to your lender for help as soon as possible — not when you’ve already missed multiple payments.
“There are often more advantageous relief options available before you start to fall behind on your payments,” Cook said. “[There are] fewer options and [greater] impact to your credit report and score the more you fall behind.”
Sell your car
Those who can no longer manage to make car payments might consider selling their car or trading it in for a less expensive one.
If you’re trading in a car you still owe money on, first determine if you have positive or negative equity. If you owe less than your car is worth, you’re in a good position because you can apply the difference toward the purchase of a cheaper car. If your car is worth less than what you owe, however, you have negative equity and you’re upside-down on your car loan. This means that when trading it in, you’ll have to pay the difference between what you owe and how much the new car is worth.
Similarly, if you can do without having a vehicle and want to sell your car outright, you must pay the difference between the sale amount of the car and how much you still owe on the car.
While opting for a cheaper car can save you money, if you’re significantly upside-down on your car loan, wait until you have equity in the car before trading it in.
Voluntary repossession
When you voluntarily repossess your car, it means you’re willingly surrendering it to the lender. This may be a last resort if you’re at risk of losing it involuntarily. When surrendering a car this way, the lender will resell the car and you must pay back the difference between how much it’s sold for and the amount you owe on it.
Voluntary repossession can have a negative effect on your credit and you may incur some late payment charges. However, giving up your car this way can be less expensive and less damaging to your credit than if your car is forcibly taken.