The Impact of Credit Scores on Mortgage Applications

Your credit score can play a significant role in whether or not you are approved for a home loan. It can also determine the type of loan that you receive and the terms that a lender will offer. Let's take a look at some of the specific ways that your credit score can impact your ability to finance a real estate purchase. 

Traditional Lenders Require a Score of 620 or Higher

You'll need a credit score of at least 620 to be approved for a conventional mortgage. A conventional mortgage is one that is not insured by the Federal Housing Administration or (FHA) or otherwise guaranteed by the federal government. Conventional home loans may be advantageous because there is no need to pay mortgage insurance premiums that can add hundreds of dollars to your mortgage payment. In addition, borrowing limits tend to be higher on mortgages that aren't insured by the government. Therefore, it may be easier to purchase a home in a more expensive market such as San Francisco or Denver. 

How Your Credit Score Might Impact an FHA Loan Application

You can be approved for an FHA loan with a credit score as low as 580. However, you may be required to make a down payment of 10%, pay a higher interest rate and agree to other stipulations that may not apply to those with higher credit scores. Generally speaking, you will be approved for a traditional FHA loan with a credit score of 620 or higher. 

A Good Credit Score Can Outweigh Negative Factors

A credit score of 660 or higher may be enough to outweigh any variables that don't work in your favor in the eyes of a lender. For instance, if you have a relatively high debt-to-income ratio, your proven track record when it comes to managing debt might allow a lender to overlook that fact when approving your application. It may also help overcome questions about your lack of cash reserves or the fact that any reserves that you do possess haven't been in your bank account for at least 90 days.

Ideally, you should check your credit report and score before submitting applications to mortgage lenders, so that there aren't any surprises. This may make it easier to estimate your chances of obtaining mortgage approval while helping you decide which loan products you're most likely eligible for.


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