Getting to 640: credit and debts before a Louisiana HomeStart loan

The most common reason a Louisiana buyer gets told "not yet" isn't income. It's a credit score a few points short or a debt load that pushes the ratio over the line. The good news is that both can usually be fixed in months, not years, once you know which numbers the programs care about.

The numbers that matter

Notice the gap. FHA will insure a loan at 580, but the Louisiana Housing Corporation sets its own floor at 640 for HomeStart. Fannie Mae's automated system has no minimum score at all, but the program floor still applies. If your score is in the 620s, CAFA may be open to you before HomeStart is. See choosing between HomeStart, CAFA and JPFA.

Debt-to-income, in plain terms

Lenders add up your new house payment (principal, interest, taxes, insurance, flood if required, any HOA dues) plus your monthly debts from your credit report. Then they divide by your gross monthly income.

Example (illustrative): A Houma paramedic earns $4,600 a month. A $1,350 house payment plus a $480 truck note and $120 in card minimums is $1,950, or about 42%. That fits under 50%. Add a $400 furniture loan before closing, and it's 51%. That's how buyers lose approvals in the last two weeks.

In south Louisiana, insurance and flood premiums are part of that house payment. A cheaper house with a higher flood bill can produce a worse ratio. More in the flood guide.

Married? Your spouse's debts may count

This is a Louisiana-specific surprise. Louisiana is a community property state, and HUD's FHA handbook says that when you live in or buy in one, the lender must:

• pull a credit report on your spouse, even if they won't be on the loan, and
• count your spouse's debts in your qualifying ratios, except debts state law specifically excludes.

Your spouse's credit history isn't a reason to deny the loan. But their car note and card payments can push your ratio up. If your spouse has a big debt in their name alone, ask your loan officer how it will be treated before you apply. Your spouse may also need to sign at closing. The act of sale guide explains why.

Separately, HomeStart Advantage's $125,000 income cap counts every adult 18 or older in the household, on the loan or not. So a spouse's income and debts can both come into play.

How student loans are counted

Each loan type handles student loans its own way:

• FHA: uses the payment on your credit report or your documented actual payment. If the report shows $0, the lender uses 0.5% of the balance, deferred or not.
• Fannie Mae conventional: a documented $0 income-driven payment can count as $0. For deferred loans or forbearance, the lender uses 1% of the balance or a documented fully amortizing payment.
• Freddie Mac conventional: must use more than $0. If the report shows $0, the lender uses 0.5% of the balance. Freddie can leave out a loan if you're approved for forgiveness and have 10 or fewer payments left, or if it stays deferred until forgiveness.
• VA and USDA: your lender confirms.

On a $40,000 balance, 0.5% is $200 a month and 1% is $400. For teachers and public employees working toward Public Service Loan Forgiveness, the loan type can change your approval. The teacher pay guide covers that.

What to fix first, in order

1. Pull your reports. Get them free at AnnualCreditReport.com and look for accounts that aren't yours, wrong late payments and old balances. The CFPB explains how to dispute errors.
2. Bring card balances down. High balances compared with your limits weigh on scores. Paying them down before the lender pulls credit often helps the most, fastest.
3. Don't open anything new. No new cards, car loans or store financing until after closing.
4. Keep paying on time. One new late payment can undo months of work.
5. Talk to a HUD-approved counselor. Housing counseling agencies around the state help with credit plans, usually free or low cost. First-time buyers need homebuyer education before a HomeStart closing anyway, and a counseling agency can cover both.

A 90-day plan, start to finish

Illustrative example: A Monroe 911 dispatcher pulls her reports in January and finds a 628 score, two cards near their limits and a medical bill reported twice.

• Weeks 1–2: she disputes the duplicate with the credit bureaus and keeps copies of everything.
• Weeks 2–8: she puts her tax refund toward the two cards and stops using them.
• Weeks 8–12: she finishes her homebuyer education course and asks her loan officer to rescore.

Every file is different, and nobody can promise a number. But the order of operations is the same: fix errors, lower balances, keep everything else quiet.

When you're close but not there

If you're at 625 today, you have choices:

• Spend two to four months on the steps above and apply for HomeStart at 640 or better.
• Compare CAFA First Home, which lists a 620 minimum, if you're outside Orleans and Jefferson parishes.
• Add a co-borrower with stronger credit, keeping in mind that their income counts toward any household cap.

Lenders can also set stricter rules than the program minimums. That's normal, so it's worth asking more than one participating lender.

Not sure where you stand? Check your eligibility. There's no credit pull, and a loan officer can tell you which number to work on first.

Questions people ask

Keep reading

• Flood zones and flood insurance when you buy in Louisiana
• Louisiana's homestead exemption: what new owners need to file
• Homeowners insurance in Louisiana: wind, deductibles and Citizens
• FORTIFIED roofs and the Fortify Homes grant for Louisiana buyers
• The notary and the act of sale: how Louisiana closings work
• New Orleans vs. Baton Rouge vs. Lafayette: what a first home really costs
• FHA, VA, USDA or conventional: picking the loan under your HomeStart help
• Paid over 9, 10 or 12 months? How Louisiana teachers qualify for a mortgage
• HomeStart, CAFA or JPFA? Choosing a Louisiana bond program and stacking local help