The credit score needed for mortgage loans has changed substantially, due to the real estate bubble and the sub-prime crisis of 2007-09. 2011, started off as a year of change where lenders started making the lending conditions more and more stricter, and the first thing that was adopted was a higher credit score requirement to sanction the real estate loans such as mortgages and home loans.
Scores and Lenders
The credit score needed for mortgage approval has been bumped up by lenders in order to avoid another sub-prime crisis, and prevent some of the losses that were incurred in the recession. Prior to the recession, several lenders gave off loans for much lower credit scores, which of course resulted into losses. The logic behind sub-prime lending is, a mortgage is a secured loan, and the price of real estate is almost always on the rise, which makes it easy to recover defaulted loan. However, in the recession, when real estate prices fell lenders went into a substantial loss. Hence, today, the requisite credit score to get a mortgage have been made much stricter.
So, what is the minimum credit score to get a mortgage?, the frank answer is 600 to 700. However, the required score differs from lender to lender and also as per your income level and credit report. On a credit score rating scale, 620 is the mid-point of all the mortgage underwriting procedure. The FICO scale which extends from 300 to 850 has 300 as the lowest score, and from a mortgage loan prospective, 300 to 620 is a bad credit score with sub-prime risks. In contrast, as we go above 620, which is the average credit score, the rate of interest and loan approval become better and better. The ideal credit score would be 850, since it will get you an assured approval and the lowest interest rate. Anything above 700 will be considered a good credit score for mortgage. In fact the Federal Housing Administration (FHA), Freddie Mae and Fannie Mae also recommend 700 as the ideal scores. Between 700 to 850 you will be charged about 5% plus rate of interest.
Though a really good credit score to get a loan is above 700, the minimal credit score needed to buy a house is 620, as there are several lenders who give out loans for rates between 600 to 700. Such loans have a higher rate of interest that goes beyond 6% and 7%. Some private lenders also give out loans for less than 600 score, but charge more than 10% to 15% interest rate.
Factors that Affect Mortgage
Apart from the credit score required for mortgage, and the usual credit score scale, the lender is bound to consider the following facts :
- Your other debt
- You monthly income
- The property, and projected value of the property
- Your overall credit report and history
- Your debt to income ratio
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