A lender can make or break the home buying process. Lenders can make home-buying the easiest or the worst transaction someone may ever encounter. A great mortgage rate can save the homeowner a ton of money over the duration of a loan. When it comes to snagging a fantastic lending company and a fabulous mortgage rate, you want to make sure you have your borrowing ducks all in a row.
I’m sure by now, you’ve heard and read tons of advice about how your credit can affect your mortgage and its terms. There is a fine line when it comes to what a potential buyer’s credit score should be, however, that score is not the only factor lenders take into consideration. Lenders do not just look at credit scores when offering a loan to a potential buyer. A buyer’s credit score is one of the largest factors considered, however, most lenders will look at the whole package of the following elements:
Income: Higher income may seem like a “guaranteed” approval from a lender. However, if your debt is especially high and consumes a large chunk of your monthly income, a lender will be less likely to view you as low-risk borrower. Lenders will also want to see that your source of income is from a steady source, with a sturdy future. They want their buyers to have a solid employment history. They seek predictability and consistency for your income sources. This convinces the lenders you’ll be able to afford, and eventually pay off, the loan.
Debt: Lenders do not expect you to be debt-free, however, they do want to see a stable, established credit history. A buyer must be sure any unpaid collections accounts or delinquent accounts are handled before starting the loan process. This will only save money (in the forms of lower interest rates) throughout the term of the loan. They’re also going to look at the balances of any outstanding debt. Most lenders desire a total debt-to-income ratio of 43% or lower. Even with an outstanding credit score, if the debt-to-income ratio is high, the loan could be denied. Lower debt balances may even compensate for bad credit. If the buyers recent credit history shows a valiant effort towards improvement, it will reduce the lender’s risks concerns. Lenders want to see a recent, solid payment history. They don’t want to see late payments or collections within the most recent past twelve months. They seek low risk from their borrowers. If a buyer’s debt warns them of future monetary issues, chances are, they aren’t going to be willing to loan any money.
Savings: Buyers should start saving for the homebuying process as soon as possible. The goal is to have the equivalent of approximately six months’ worth of mortgage payments in a savings account. This does not include any down payment, closing costs, property taxes, or PMI expenses the buyer may face during the closing. Lenders want to see that their potential buyer has enough responsibility to have an emergency fund in case of maintenance needs, loss of employment, etc. Remember, they want buyers that have the potential to repay their loan and can be considered a low risk.
Finally, they will be looking at the buyer’s credit score. There is no set minimum score the lenders are seeking. They’re looking for positive outcomes on all the factors which affect credit scores. Factors such as payment history, credit utilization, age of credit lines, types of credit lines, and how many credit inquires have been made recently on the buyer. The lenders’ decisions can change or fluctuate depending on the state of our economy. If the economy is in a recession, lenders tend to enforce tighter restrictions on loan approvals.
The average desirable credit score for a conventional mortgage lands around 682. Conventional loans backed by Fannie Mae or Freddie Mac usually require a minimum credit score of 620. For an FHA mortgage, lenders seek an average credit score of 649. However, with a 3.5% down-payment, that credit score may dip as low as 580. If the credit score is lower than 580, an FHA mortgage will usually require a 10% down payment.
So, the keys to snagging that perfect lender and loan: keep those credit payments on time, keep debt totals low, and limit those credit applications. As debt decreases and savings increase, that credit score will climb to new heights.