Does Credit score or Earnings Matter Extra When Acquiring a Mortgage?
Your credit information and income play a huge role in being creditworthy and getting what you want. With an impressive credit score and an excellent income to boot, you can apply for a mortgage, get a car, open new credit card, and many other things.
We are going to dig deeper into these concepts and their relationship as it relates to obtaining a mortgage.
Lenders Assess Risks
When you meet with a lender to apply for a mortgage loan, they want to know that they can trust you to pay up. And so, they will begin to assess all the risks involved in granting your requests.
These risk assessments may involve checking your credit report and score to see if it’s impressive enough to be approved. Your monthly income is also checked out to see if you’re eligible for the mortgage loan.
If these risks are negligible, the loan process will continue to the next phase. However, if they discovered that your credit score and income are less than the requirements, they would not approve your loan. If they do, you’d typically receive an offer with a stiff interest rate attached.
How Credit Plays a Role in Getting a Mortgage
Your credit information plays a significant role in getting that mortgage loan approval. When you approach lenders to request a loan, below are the following factors they may look at in your credit information:
- Payment history. Your payment history is perhaps the most important factor in lenders’ reviews. They want to ensure you have a habit of making timely repayments of all your loans. If your payment history is impressive, they see you as financially responsible. However, if they find out you have some late or missed payments, they may question you about it.
- derogatories. They will also review your credit information to see any derogatories. Common examples of derogatories include bankruptcy, charge-offs, delinquent account that may make you look riskier to any lender.
- Recent applications. Your prospective lender also looks at your current loan, credit, or debt applications. Most of those applications result in hard inquiries, which affects your credit score. When you have too many hard inquiries, you appear risky to a lender who may decide not to approve your mortgage loan request.
- disputes. Lenders also look at your credit report to see if there are any disputes, court rulings, or settlements. Your prospective lender may decline your request if you have a pending dispute on your credit information. Thus, it is recommended that you squash any dispute before applying for a mortgage loan.
- Credit utilization ratio. Your credit utilization ratio is another fact that lenders analyze. The ratio shows how much of your available credit you’re utilizing. For instance, if your credit card limit is $3,000 and you use $450, your credit utilization ratio will be 0.15 (which is 15%). Most lenders prefer you to have a ratio of 30% and less to be eligible for their loan.
- Being an authorized user. Another factor in your credit information lenders will be looking at is if you’re an authorized user on someone’s else credit. If you are, the activity of the primary credit will show up on your credit report. If the activity on that credit is impressive, your credit looks good to a lender and vice versa. However, some lenders may not see this as a good sign – being that you’re on someone else’s credit.
Range of Credit Scores for Mortgage and Implications on Interest Rates
Your credit score must meet their criteria to secure a mortgage loan from a lender successfully. Generally, more lenders will require you to have a minimum credit score of 620 to get approved for a mortgage loan. However, some lenders may require a higher credit score to qualify for their loans depending on loan type.
If your credit score doesn’t make you eligible, they may not approve your loan or choose to offer you a higher interest rate, resulting in increased monthly payments.
How Income Plays a Role in Getting a Mortgage
Your income also plays a notable role in securing a mortgage loan. Why? It will go a long way in repaying your loans. The Federal Housing Administration (FHA) doesn’t have specific income requirements in securing a mortgage loan.
Some lenders may review your employment record and your debt-to-income ratio in considering your request for their loans.
Debt-To-Income and What It Means to Mortgage Loan Amount
Your debt-to-income ratio (DTI) is vital in clinching that mortgage from a prospective lender. Your DTI reveals how much your income is directed towards paying off your monthly debts. The DTI ratio is your monthly expenses and debts divided by your monthly income.
If you make $6,500 monthly and your total debts for the month is $2,100, your DTI ratio is 0.32, which is 32%. This percentage is crucial in deciding the loan amount your lender will approve.
Different loan types require different DTI requirements. Generally speaking, you want your DTI as low as possible, but especially with FHA it needs to be below 43%.
Your credit information and income both play a massive role in getting the loan for that American Dream. The home buying process is a huge undertaking, but, ultimately, the reward is well worth the headaches.
The Phenix Group offers free credit analysis and consultations, including strategies to maintain good credit. Contact us today.