In order to qualify for a home loan, there are many contributing factors. Keep in mind that one of the crucial factors is your credit score. Just a single point below certain lender thresholds can make a big impact on whether you qualify for financing or not. Since your credit score is a three-digit number, it’s been a reliable and time-tested way to establish minimum requirements.
Although some industry standards exist concerning the minimum credit score for a certain type of loan, the actual credit score necessary is determined by the individual lender. Below is a guide to help you know which loan types you may qualify for based on your current credit score. Lenders typically use your middle credit score from the 3 major bureaus.
Major Credit Score Thresholds
500 Credit Score ( up to 579 scores)
A borrower needs to have a minimum credit score of 500 to get an FHA mortgage. with a score from 500 – 580, they must make a 10% down payment. However, certain lenders, such as banks, will still consider this borrower as high risk and not approve the loan. So, your best option is to work with a Colorado mortgage broker who has loan products for applicants with a 500 or more credit score. Additionally, your overall monthly debt payments cannot be more than 43 percent of your gross monthly income.
580 Credit Score (up to 619 scores)
Borrowers with a 580 credit score will qualify for an FHA loan with just 3.% down. Moreover, a higher DTI of 47 percent is allowed (47% of gross income can go towards paying monthly debts). In order to qualify for the higher Debt-to-Income ratio, compensating factor is needed in your favor.
A compensating factor includes things like verified cash reserves – 3 – 6 months of more what is required.
The second is a minimal housing payment increase. The new mortgage payment is not greater than $100 or 5-percent of your current rent or mortgage payment. The third is you had (1) or no 30-day lates on housing in past 12 months. The fourth is you have passive or residual income
Wait, it gets better. If you have two compensating factors, a debt-to-income ratio as much as 50 percent may be allowed. It always depends on the lender.
620 Credit Score
The majority of lenders consider a 620 credit score as the absolute minimum to be eligible for conventional financing. A large reason is because Fannie Mae and Freddie Mac use this as a minimum credit score. By originating loans for borrowers who meet that minimum, they can sell their loans to these companies on the secondary market. Understand that a borrower with a 620 credit score, and has their file manually underwritten as opposed to automatically underwritten, may only get 75 percent of the home’s value, and needs to have a 36 percent DTI.
A terrific loan choice for active or veteran military members is the VA loan by the Department of Veterans Affairs. The reason is there are no minimum credit score requirement, but many lenders incorporate a 620 minimum credit score to qualify. With Lowry AFB in Denver and the Air Force Academy in Colorado Springs, members of the armed forces can know fairly quick if they qualify.
640 Credit Score
A middle credit score of 640 is the minimum needed for an Adjustable Rate Mortgages (ARMs) by Fannie Mae and Freddie Mac. This is still a relatively low score so the same guidelines above apply with just 75 percent financing of the home’s value and a 36 DTI.
This score qualifies for borrower who experienced a recent short sale, foreclosure, or bankruptcy or those wanting a low documentation loan.
Good to Excellent Credit Scores
680 Credit Score
The 680 and higher score range is a major threshold for borrowers seeking to obtain 80 – 90 percent financing on a conventional loan. This score also gets you better rates on loans without tax returns.
A 680 middle credit score is also the minimum required score to be approved for a jumbo mortgage, greater than $493,350 in Denver and Boulder. As of 2018, the jumbo limit is now greater than $529,000
700 Credit Score
With a 700 credit score, you may qualify for financing up to 97 percent of the home’s value using conventional financing and have a maximum 45% (50% as of late 2017) debt-to-income ratio depending on the program and property type.
A credit score of 700 or higher may also qualify you for better interest rate on other types of loans.
720 and higher
A prospective borrower with a 720 and higher score may obtain up to 95% financing on a $1.5 million dollar loan. Usually, a combo 1st and 2nd mortgage with work best for a reduced monthly payment.