What Credit Score Is Needed To Buy A House

What Credit Score Is Needed To Buy A House

When it comes to purchasing a home, your credit score will play an important part in obtaining a loan. Let’s take a look at how credit scores work and what you need yours to be in order to get the best terms on a conventional loan.

What Is A Credit Score?

Simply put, a credit score is a numerical representation of a person’s creditworthiness. It can also be described as a number assigned to a borrower that indicates to lenders how likely that person is to repay a loan. Credit scores are made up of a number of factors, including the amount of a person’s debt, payment history, how many credit lines are open, and debt to income ratio. Credit scores range from 300 to 850, with the higher numbers always being better.

Conventional Loans & Credit Scores

Most lenders require that borrowers have a minimum credit score of between 620 and 680 in order to be approved for a conventional home loan.

Here are some other important things to consider when buying a home:

  • Your credit score will determine your loan’s interest rate. Scores of 720 or more will obtain the most favorable rates.
  • Higher credit scores will also allow borrowers to have higher LTV (Loan to Value) ratios. Loan to Value is defined as the amount of a loan as compared to the total value of a property. For example, a $130.000 mortgage loan on a $150,000 house has a loan to value ratio of 87%.
  • Higher credit scores can also help borrowers increase their debt to income ratios, which is a measurement that compares the percentage of a borrower’s debt to their income.

How To Improve Your Credit Score

If you are in the market to purchase a home through a conventional loan, having the highest credit score possible will go a long way in obtaining your goal. If your credit score is not where you would like it to be, here are some great tips on how to improve it.

  • Check your credit report – The first step to improving your credit score is making sure that it contains correct information about you. If there is wrong or inaccurate data on your report, be sure to contact the major credit agencies and dispute the information.
  • Pay Your Bills On Time – One of the best ways to prove to a lender that you are a good credit risk is to have a history of reliable and timely payments on your obligations.
  • Debt To Income Ratio – Maintaining a favorable debt to income ratio can be a great help in the effort to improve your credit score. This ratio measures your gross income against the amount of money that you have to pay each month to meet your debt obligations.
    Mortgage experts say that your debt to income ratio should not be more than 36% (including your mortgage). For example, if your gross income is $3,000 per month, your debt to income ratio should not be more than $1080. Lenders like to see that your non-mortgage debt obligations will not threaten your ability to make timely and full payments on your home loan.
  • Decrease Your Credit Card Utilization Rate – Lenders do not like to see borrowers with excessive credit card utilization rates. Try to always keep your credit card balances under 30% of your total credit line limit.

Conventional Loan Credit Score Requirements

We Can Help

The dedicated team at Better Lending has helped many homeowners at various credit score levels obtain a conventional loan to purchase the house of their dreams. No matter what your credit score is, contact us today to learn more about what we can do to qualify for a loan and help you experience the pride of homeownership.

How To Get Pre Approved For A Mortgage

Whether you are a first-time house buyer, or looking to purchase your next home, getting pre-approved for a mortgage can be extremely helpful during the house-hunting process. Let’s take a look at the difference between a mortgage pre-approval vs. a pre-qualification, the advantages of having a pre-approval, and how to obtain one.

Mortgage Pre-qualification vs. Pre-approval

A pre-qualification typically takes place very early in the home buying process. Simply put, a pre-qualification is an estimate of how much a lender might be willing to loan you. This is based on financial information that the lender is provided and a check of your credit score. It is essential to understand that a pre-qualification is not a commitment on the part of a lender to loan you money for a home.

A pre-approval is an actual offer to lend you a specific amount of funds to purchase a house. While it is also not an official commitment, a pre-approval holds a lot more credibility in the marketplace with sellers and real estate professionals. Pre-approvals are generally valid for up to 90 days.

The Advantages Of Having A Mortgage Pre-approval

There are many benefits to obtaining a mortgage pre-approval when buying a home, including:

  • Helps determine what price range of homes to consider, based upon mortgage amount.
  • Gives sellers the confidence that you are a serious buyer.
  • Price negotiations with sellers are more fruitful.
  • Real estate agents are more likely to focus more on buyers with a pre-approval document.
  • Once a home is selected, a pre-approval makes the purchase process go much faster.

How To Get Pre-Approved For A Mortgage

The process of getting a pre-approval for a mortgage is not complicated but does involve specific steps.

Verification Of Income

Lenders will need documentation of your income for at least the past two years. Most people can provide their W-2 statements, which will give the mortgage underwriters all of the information they need concerning your income.
If you are self-employed or a contractor, tax return documents will suffice as well. Some underwriters may ask for recent pay stubs, bank statements from bank accounts, or credit card documentation. Your lender wants to make sure that you have enough consistent income to pay your mortgage every month.

Proof of Assets

In addition to income, lenders need to verify that you have the necessary assets to fund a down payment and take care of other mortgage-related expenses, such as closing costs. Being able to show that you also possess a reasonable amount of cash reserves can be very helpful during the pre-approval process.

Credit Score

A person’s credit score is a numeric measurement of their history of debt repayment. A good credit score is a significant component of successfully obtaining a mortgage pre-approval. For a conventional loan, most lenders require applicants to have a credit score of 620-680 and above.

Debt To Income Ratio

During the pre-approval process, lending underwriters often evaluate an applicant’s debt to income ratio. Simply put, a homebuyer’s debt payments should not exceed 36% of their monthly gross income. For example, if your monthly pre-tax income is $5,000, your debt payments (including the mortgage) should not be more than $1,800.

Employment History & Verification

Getting pre-approved for a mortgage is all about demonstrating that you will be able to repay your loan each month. In addition to W-2 statements or other income documents, lenders will also verify that you are employed. Underwriters also look at your W-2 to check your employer’s information as well as your annual salary.

Mortgage Pre-approvals

The dedicated team at Better Lending has helped thousands of our customers obtain a pre-approval mortgage document. A pre-approval is the best way to approach the house buying process, as it gives everyone involved the confidence to know that you are serious about purchasing a new residence. Contact us today to learn more about how we can provide you with the peace of mind that comes with having a mortgage pre-approval while searching for the perfect home.

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