Knowing what you credit sore is the greatest predictor on whether you’re going to be approved for a mortgage or not, so you might be wondering, what score do I need to get approved for a mortgage loan in 2013?
From the very start of the mortgage crisis back in 2007-08, many lenders have become more conservative in their lending guidelines. Pre-mortgage crisis, you could get approved by your local bank or mortgage lender if your mortgage equaled 50% or less of your income and as little as if you had a social security number.
To get approved these days for a standard (conventional) mortgage, lenders are wanting to see the lower of your two credit scores, out of the three (Experian, Equifax, Transunion,) to be at least a 620 or above. To be able to acquire the lowest interest rates, mortgage lenders are looking for credit scores in the 720 and higher range. However, there are ways to get around having lower scores though such as government insured FHA and VA mortgage programs.
Your credit score isn’t the only requirement
Mortgage lenders also want for you to become invested in your home on day one. They want something else that ties you to the collateral more so than just your credit report – they want a healthy down payment. If you can come up with at least 20% of the purchase price of your home, you are able to meet this requirement. Some lenders do require less, but if you do find a lender that will accept less, then you are required to pay PMI (Private Mortgage Insurance.)
PMI is insurance that you pay monthly installments on and is included in your monthly mortgage payment to protect the lender in case of default. It’s estimated annually at .5% of the amount borrowed and then dived by 12 to be included within your mortgage payment. Once you have built up at least 20%, you no longer have to pay.
There used to be a way to get around having to pay PMI and not coming up with the full 20% and perhaps nothing down at all. It was known as a piggyback mortgage, which for example was essentially two mortgage loans taken out at the same time with the smaller second loan was meant to fund the first loans’ down payment. These were also often called 80/20’s or 80/15’s, which ever percentage the second loan was. These loan products, also known as lines of credit, are pretty much extinct to people that do not have excellent credit.
Don’t forget about your debt to income ratio
So what does DTI mean? Debt to income ratio is the percentage of your debts compared to your income. For example, let’s say that you have a car payment of $200, credit card payment in the amount of $25, rent and utilities in the amount of $500, and your income is $3,000. Once calculated, this would mean that you have a DTI income ratio 25% debt to income ratio, which is healthy and acceptable in the eyes of mortgage lenders.
The debt to income ratio requirement for conventional mortgage lenders is no greater than 28%. Let’s take a look back at pre-mortgage crisis real quick. Now the logic behind 28% makes a lot of sense, doesn’t it? Before the mortgage crisis, you could have your debt to income ratio as high as 50%! Are you starting to see a trend here?
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