What Credit Score Do You Need To Get Approved For A Mortgage?
For many people, homeownership is part of the American dream – you work hard and save up to buy your dream home. And to make that dream a reality, most likely, you’ll need a home mortgage. When applying for a mortgage, one of the most important factors is your credit score. Having a good credit history makes it easier to be approved for a home mortgage. But there are many different types of loans, and each has its own set of requirements and minimum credit scores. So, if you’re shopping around for a home mortgage, do your homework so that you can be approved and get the best deal.
Here’s what you need to know about ideal credit scores for certain types of home mortgages:
FHA Loans: FHA loans are insured by the Federal Housing Administration, making them less risky for lenders and, because of this, easier to qualify for than conventional loans. You must have a minimum score of 580 to qualify for the low down payment advantage of 3.5%. If your credit score is below 580, you may still qualify, but you will need to provide a 10% down payment.
Conventional Loans: Conventional mortgages are home loans that follow the standards set by Fannie Mae and Freddie Mac. They’re uninsured by any government agency. These loans require a 620 minimum score.
VA Loans: If you meet the requirements, a VA loan, insured by the U.S. Department of Veterans Affairs, can be a smart financial move. That’s because these loans don’t require any down payment at all. They’re also available to borrowers with lower credit scores. The difficult part is meeting those eligibility requirements:
- You must be a member or veteran of the U.S. Military or a member or veteran of the U.S. Military Reserves or National Guard.
- Spouses of military members who died while on activity duty or because of a service-related disability can also apply for one of these loans.
If you meet these requirements, there is no minimum requirement, but most lenders prefer you have a credit score of 620 or higher.
Jumbo Loans: This type of loan represents a greater risk for the lender, and applicants need a credit score of 700 or higher.
So, if you’re shopping around for a home mortgage, first know what credit score you need for approval.
3 Tips to Improve Your Chance Of Getting Approved For a Mortgage
Your credit score is used to determine if you are approved and what rate lenders will offer you. But what if you have a low credit score? Don’t fret – with a plan, you can improve your score to get the best deal on your home mortgage. So that you can get the best mortgage deal, here are 3 tips to improve your mortgage worthiness:
- Manage Your Debts: Your payment history will be evaluated to determine your creditworthiness. Pay your bills on time and maintain a low used credit to available credit ratio.
- Start Building Your Assets: The more liquid assets you have, the more likely a lender will view you as less risky – and offer you a lower rate on your mortgage.
- Establish Good Credit Behavior: The better your credit behavior, the more likely you will receive loan approval with favorable terms. So, pay your bills – including rent – on time, do not apply for more credit than you can afford, keep your accounts open as long as possible, and check your credit reports.
Other Factors That Mortgage Lenders Consider When Approving
Your credit score is not the only factor that lenders consider. Here are some other factors that you should consider:
Income: Lenders will also look at your income. They want to make sure you make enough money each month to afford your payments.
Debt-To-Income Ratio: Lenders also look at your monthly debts. Lenders vary, but they generally want your total monthly debts, including your estimated new mortgage payment, to consume no more than 43% of your gross monthly income. If your debt-to-income ratio is higher, you might struggle to qualify for a mortgage.
Down Payment: The bigger your down payment, the more likely it is that you’ll qualify for a mortgage with a lower interest rate. That’s because lenders think you are less likely to stop making your payments if you’ve already invested a significant amount of your money into your loan. A higher down payment, then, makes your loan less risky for lenders.
Savings: Lenders want to make sure that you have funds available to make your mortgage payment if your income should unexpectedly dry up. Because of this, most will want to see that you have enough money saved to cover at least two months of mortgage payments.
Employment History: Lenders vary, but they usually like to see that you’ve worked at the same job, or at least in the same industry, for at least 2 years. They believe you’re less likely to lose that job, and that stream of income, if you’ve built up a longer work history.