Advertiser Disclosure

Mortgage

What Credit Score Do You Really Need for a Mortgage?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Young Couple Moving In To New Home Together

Love it or hate it, your credit score has a big influence over your financial life. Planning to apply for a mortgage in the near future? Your credit score can make or break your ability to qualify for a home loan.

Because your credit score is such an important part of the homebuying process, it pays to understand how lenders view it.

Credit score requirements by mortgage type

When you’re preparing to purchase a home, one of the first decisions you’ll need to make is which type of mortgage is best for you. The condition of your credit score may come into play when you are making your decision.

Here are the minimum credit score requirements for conventional, FHA, VA and USDA mortgage programs:

Mortgage TypeCredit score
Conventional620
FHA500 (10% down payment required)
580 (3.5% down payment required)
VANo set minimum (entire loan profile reviewed instead)
USDA580 (if eligible for a credit exception)
640 (for automatic approval)

Do lenders abide by minimum credit score requirements?

Under most circumstances, lenders will not issue a mortgage if your credit score falls beneath the minimum thresholds listed above. Why not? The answer lies in the secondary mortgage market.

Because lenders are working with a finite budget, it’s common for them to sell the loans they make to another company. Lenders don’t have unlimited funds to keep granting new mortgages to new customers while they wait 30 years for you to pay back your loan. At some point, the lender would run out of money.

To avoid this issue, lenders routinely package up their loans and sell them on what is known as the secondary mortgage market. Larger companies, such as banks or government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, purchase the loans (and often resell them again to investors).

For a GSE or investor to be interested in buying a loan from a lender, the loan has to meet that entity’s minimum score requirements. If a lender issued you a conventional mortgage at a credit score under 620, Fannie Mae/Freddie Mac wouldn’t be interested in buying the loan later. Instead, the lender would likely have to keep your loan on its books until you paid it off, refinanced or until the lender could find another buyer for it.

Lenders don’t want to be stuck with loans on their books. It limits the future mortgages the company can write. As a result, lenders don’t typically write loans for people who don’t meet minimum score requirements.

When it comes to FHA, VA and USDA loans, minimum credit score requirements are firm. A lender couldn’t issue these loans to applicants with lower credit scores, even if they wanted to.

Lenders might require a higher-than-minimum score

If you’re a potential homebuyer with a credit score close to the cutoff point, here’s a bit of bad news: Some lenders may require even higher scores than those listed above in order to approve your mortgage application.

Many lenders have internal policies known as lender overlays. Such overlays often feature stricter credit score requirements. This means that even if your credit score satisfies a mortgage program’s minimum requirement, it might not be high enough to satisfy every lender.

But why would lenders ask for a higher minimum credit score than is required for your loan type? In the end, it comes down to risk management.

Casey Fleming, veteran mortgage adviser in Silicon Valley and the author of The Loan Guide: How to Get the Best Possible Mortgage, offers some insight.

“Each lender has to do its own risk management/profitability equation. Higher risk means a higher cost of servicing loans when a borrower goes into default, which is much more likely at lower credit scores. Typically, lenders will either offer very good pricing but require very high scores, or they will do the opposite.”

Rick Melville, a certified mortgage planner with 24 years of experience, explains that overlays exist because “many lenders desire a higher credit score threshold to provide safety for their portfolio.”

So, although the FHA minimum median credit score requirement may be 580 on loans with a 3.5% down payment, some lenders might choose not to approve loans unless the borrower’s median score is 640 or higher.

How your credit score can affect your home loan

Your credit score has the ability to affect more than whether your loan is approved or denied.

  • Your credit score affects how much interest you’ll be charged for your mortgage. Lower credit scores typically equal higher interest rates. Higher credit scores typically equal the opposite.
  • The size of your down payment may be affected by your credit score.
    Lower credit scores could also equal a bigger down payment requirement to qualify for a mortgage. With an FHA loan, for example, you may qualify for a low 3.5% down payment if your credit score is 580 or higher. Yet if your score falls between 500 and 579, you might have to put up 10% instead (if you can find a lender willing to approve your loan application).
  • Your monthly payment can be influenced by your credit score.
    Naturally, if a lower credit score results in a higher interest rate for your mortgage, you can expect to pay a higher monthly payment than you would have been charged otherwise. But that’s not the only way your credit score can influence the size of your monthly payment.If you finance more than 80% of a home’s value, your lender will likely require you to purchase private mortgage insurance (PMI). For conventional loans in particular, the cost of your PMI premium is influenced by your credit score. In other words, borrowers with lower credit scores pay higher PMI premiums.

Good news: Your credit score is not the only factor that matters when you buy a home

You credit score matters a great deal when you want to buy a house. It is not, however, the be-all and end-all of qualifying for a mortgage. Your credit score is just one piece of the equation.

Lenders look at factors beyond credit score to decide whether to approve your mortgage application as well, including

  • Loan-to-value ratio
    Loan-to-value (LTV) ratio describes the relationship between a property’s value and the size of the loan against it. If the home you plan to purchase costs $240,000 but appraises at $300,000, for example, the LTV would be 80% (loan amount divided by appraised value).A larger down payment could also result in a lower LTV ratio. From a lender’s perspective, the lower the LTV, the better.
  • Down payment size
    Most loans will require that you bring a down payment of a certain size to the closing table. If you can put up a larger down payment, however, you might improve your odds of qualifying or secure a better interest rate for your loan.
  • Debt-to-income ratio
    Debt-to-income (DTI) ratio measures how much of your income is used to pay your debts each month. Lenders calculate DTI by adding up your monthly debt payments and dividing them by your total gross monthly income.The more money you pay out monthly to others, the more likely you are to default on a mortgage. As a result, the less you owe (i.e., the lower your DTI), the higher your odds of being approved for a new home loan.Having money in reserve can also make you a more attractive borrower. Reserves are liquid assets you could tap into to make your mortgage payment if needed, such as

    • Checking accounts
    • Savings accounts
    • Retirement accounts
    • Investments (stocks, bonds, mutual funds, CDs, etc.)
  • Current income and employment history
    To qualify for a mortgage, you need to have a steady job and stable income, and you need to be able to prove that you do. When you apply for a mortgage, lenders will review your pay stubs, tax returns, bank statements and other information to assess your level of risk.Your income is also a key component you should consider personally when you’re figuring out how much house you can afford. Try LendingTree’s home affordability calculator to get a better idea of your ideal home price. LendingTree owns MagnifyMoney.

How to prepare your credit for a mortgage

It’s true that it can be incredibly difficult, often impossible, to qualify for a mortgage with a low credit score. But here’s the good news: With hard work and a little patience, credit scores can be improved.

Check out the following tips on how you can work to get your credit score where it needs to be.

Review your three credit reports. Your credit scores are based upon the information found in your credit reports from Equifax, TransUnion and Experian. Unfortunately, despite your creditors and the credit bureaus’ best efforts, credit reporting mistakes can sometimes happen.

If a mistake winds up on your credit reports, it can damage your credit scores whether the information is accurate or not. The only way you can be sure the information on your three credit reports is accurate is to review them yourself.

Federal law gives you the right to get a free copy of your three credit reports every 12 months via AnnualCreditReport.com.

Melville advised, “Pull the credit now if you’re planning to apply for a mortgage any time soon. It can help to know what you’re dealing with in advance.”

Correct errors on your credit reports.

Should you discover errors on your credit reports, federal law gives right to dispute those mistakes with the credit bureaus. According to the Fair Credit Reporting Act (FCRA), when you dispute an item on your credit report you disagree with, it has to be investigated.

If a credit bureau can’t verify the disputed information as accurate, the item in question must be fixed or removed from your credit report entirely, usually within 30 days.

Pay down your credit cards

Reducing your credit card debt might be another effective way to give your credit score a boost. According to FICO, you should aim to keep your balances low on credit cards and other revolving debt.

High outstanding debt can affect your score in a negative way. With credit cards specifically, using a high percentage of your available credit can indicate that you’re overextended and more likely to make late payments. Your credit scores can suffer as a result.

On the flip side, if you pay those balances down, you could be doing your credit scores (and your wallet) a big favor.

What’s next?

If you think your credit may be strong enough to qualify for a mortgage, the next step is to shop around and find the best loan offer available.

Fleming recommends to start by “meeting with an experienced, competent, ethical mortgage adviser before you go shopping for a home.

Even if you’re unsure about your credit scores, speaking with a mortgage professional might be helpful.”

He added that “reasons for low credit scores vary dramatically. Many folks find they actually hurt their scores when they try to improve them. A good mortgage adviser should be able to tell you whether your score is an issue or not, how much of an issue it is, and what would help you the most in bringing your score up (assuming you need to).”

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Michelle Black
Michelle Black |

Michelle Black is a writer at MagnifyMoney. You can email Michelle here

TAGS:

Advertiser Disclosure

Mortgage

Guide to Getting a Federal Housing Administration (FHA) Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Couple Celebrating Moving Into New Home With Champagne

Not all homebuyers have the money to make a traditional 20% down payment. The perception that you need one is one of the main financial obstacles that can discourage people from pursuing homeownership.

In reality, there are several options for buyers who want to get a mortgage but can only pull together a small down payment. One of the best ones, particularly for first-time homebuyers, is an FHA loan.

This article offers you a guide to getting an FHA mortgage, including details on how to qualify and the costs to consider.

Understanding the FHA mortgage program

FHA mortgages are insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development. The program is a key way that people of moderate income can become homeowners. Nearly 83% of homeowners who borrowed an FHA loan in 2018 were first-time homebuyers, according to a report from HUD.

FHA mortgages are funded by FHA-approved lenders and then insured by the government. This backing protects lenders from loss if borrowers default. Because of this protection, lenders can be more lenient with their qualifying criteria and can accept a significantly lower down payment.

You can get approved for an FHA mortgage with as little as a 3.5% down payment and a credit score of 580. You may also qualify with a credit score as low as 500, though you’ll need to put down 10% instead.

On a $200,000 home, that comes out to a down payment of $7,000 to $20,000 when taking out an FHA loan, depending on your credit score.

Keep in mind you’ll also be responsible for closing costs, which typically cost 2% to 5% of a home’s purchase price. Closing costs are necessary to complete your transaction, and include services such as appraisals and home inspections. However, you may be able to negotiate to have some of these costs covered by the seller.

Is an FHA loan right for you?

FHA loans are particularly suited for several different types of homebuyers.

First-time homebuyers, who often have lower credit scores and smaller available down payments, tend to gravitate to FHA loans. Additionally, boomerang buyers — people who lost a home in the past due to a bankruptcy, foreclosure or short sale — might also benefit from an FHA loan.

Negative credit events such as foreclosure can drop credit scores by more than 100 points in many cases, and there’s typically a waiting period of three years before you’re eligible to buy a home again. Once that’s up, the lower credit score requirements of the FHA loan program could help you become a homeowner again.

Types of FHA mortgages

The FHA offers both 15- and 30-year mortgages, each with fixed rates or adjustable rates.

With a fixed-rate FHA mortgage, your interest rate is consistent through the loan term. You know what your principal and interest payment will be for the life of the mortgage. However, your overall monthly payment may increase or decrease slightly based on your homeowners insurance, mortgage insurance premium and property taxes.

Adjustable-rate FHA mortgages start out with a low and fixed interest rate during an introductory period of time, usually five years. Once the introductory period ends, the interest rate will adjust annually, which means your monthly mortgage payments may increase based on market conditions.

A unique situation where signing up for a low, adjustable-rate FHA mortgage could make sense is if you plan to sell or refinance the home before the introductory period ends and the interest rate changes. Otherwise, a fixed-rate FHA mortgage has predictable principal and interest payments and may be the better option.

FHA loan limits

The FHA imposes a limit on the amount of money that homebuyers are allowed to borrow each year. For 2019, the FHA loan limits for one-unit properties are $314,827 in most U.S. counties and $726,525 for high-cost areas. You can find your county’s loan limit information for one- to four-unit properties by using the FHA’s lookup tool.

Qualifying for an FHA loan

Besides the low down payment, an undeniable benefit of the FHA mortgage is the low credit score requirement. You may qualify for a 3.5% down payment with a credit score of 580 or higher. You can qualify with a minimum credit score of 500, but you’ll have to make at least a 10% down payment.

Your debt-to-income (DTI) ratio is another key metric lenders use when determining whether you can afford a mortgage. DTI measures the percentage of your gross monthly income that is used to repay debt. Lenders consider two DTI ratios when determining your eligibility — the front-end (housing debt) ratio and the back-end (total debt) ratio.

Your front-end ratio is the percentage of your income it would take to cover your total monthly mortgage payment. Lenders typically like to see a front-end ratio of no more than 31%.

Your back-end ratio illustrates the percentage of your income that covers your total monthly debts. Lenders prefer a back-end ratio of 43% or less, but may approve a higher ratio if you have compensating factors, such as a higher credit score or a larger down payment.

You’ll also need to have a steady income and proof of employment for the last two years. Additionally, the home you’re purchasing via FHA must also be your primary residence, at least for the first year.

FHA mortgage insurance

At first glance, an FHA mortgage probably seems like the ultimate hack to buying a home with minimal savings. The flip side to this is you must pay mortgage insurance premiums (MIP) in exchange for your lower down payment.

Remember, FHA-approved lenders offer mortgages that require less money down and flexible qualifying criteria because the Federal Housing Administration will cover the loss if you default on the loan. The government doesn’t do this for free.

FHA mortgage borrowers must “put money in the pot” to cover the cost of this backing through upfront and annual mortgage insurance premiums. The upfront insurance premium costs 1.75% of the loan amount and can be rolled into your mortgage balance.

The annual mortgage insurance premium is divided into 12 installments and paid monthly as part of your mortgage payment. The annual premium ranges from 0.45% to 1.05%, based on your loan term, loan amount and loan-to-value ratio (LTV).

Your LTV is a metric that compares your loan amount to your home’s value. It also represents the equity you have in the property. For example, putting 3.5% down means your LTV would be 96.5%. In other words, you have 3.5% equity in the home, and your loan is covering the remaining 96.5% of the home value.

Here’s the annual MIP on a 30-year FHA mortgage (for loans less than or equal to $625,500):

  • LTV over 95% (you initially have less than 5% equity in the home) – 0.85%
  • LTV under 95% (you initially have more than 5% equity in the home) – 0.8%

As you can see, starting off with a smaller down payment will cost you more in mortgage insurance premiums. Additionally, in most cases, you’ll pay annual MIP for the life of your loan.

However, if your LTV was less than or equal to 90% at time of origination — meaning you made a down payment of at least 10% — you can cancel MIP after 11 years.

FHA loans vs. conventional loans

Government-backed home mortgages like the FHA loan are special programs serving borrowers who might not qualify for a traditional mortgage.

Conventional mortgages are offered by lenders and banks and typically follow Fannie Mae and Freddie Mac’s mortgage standards. Fannie and Freddie are government-sponsored enterprises that buy loans from mortgage lenders and banks that fit their requirements.

The qualifying criteria bar for conforming loans is usually set higher. For instance, you typically need to have at least a 620 credit score to qualify for a fixed-rate conventional loan. However, credit score minimums vary by lender, but in any case, a score above 620 will be necessary for the most competitive interest rates.

A misconception about conventional mortgages is that borrowers must have 20% for a down payment to qualify. Mortgage lenders may accept less than 20% down for a conventional mortgage if you have a high credit score and pay their version of mortgage insurance premiums, which is called private mortgage insurance (PMI).

Similar to FHA mortgage insurance, PMI is a private insurance policy that protects the lender if you default. Be careful not to confuse the two types of insurance policies.

If you have PMI on a conventional mortgage, you’re able to request the removal of those insurance payments when you build up 20% equity in your home. On the other hand, the mortgage insurance premiums for most new FHA mortgages can’t be removed unless you refinance.

When to choose a conventional mortgage instead

Choosing an FHA loan can be a shortcut to homeownership if you don’t have much cash saved or the credit history to get approved for a conventional mortgage. Still, the convenience comes at a price that can follow you for the entire loan term.

Furthermore, putting a small sum down on a home means it will take you quite some time to build up equity. A small down payment can also increase your monthly payments and interest rate.

Homebuyers with a strong credit score should consider saving a bit more money and shopping for a conventional home loan first before thinking an FHA mortgage is the only answer to a limited down payment.

If you plan to put down at least 5% toward your home purchase and have a good or excellent credit score, it might make sense to borrow a conventional mortgage instead. A conventional home loan with PMI may not require the same upfront insurance payment as the FHA home loan, so you can find some savings there. Plus, you’re capable of getting rid of PMI without refinancing.

There are a few conventional mortgage programs that allow a 3% down payment, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible program. These products also have cancellable mortgage insurance.

Shopping for an FHA loan

So, you’ve reviewed all the information and determined that an FHA loan is right for you. Once you’re ready to start the homebuying process, one of the most important things on your to-do list is shopping around.

Gather quotes from multiple FHA-approved lenders to find the most competitive rate. If you’re unfamiliar with the approved lenders in your area, you can use the HUD’s lender list search to locate them.

Comparison shopping for the best mortgage rate can save you thousands in interest over the life of your loan, according to research from LendingTree, which owns MagnifyMoney. Be sure you also compare the various other costs associated with borrowing a mortgage, including lender fees and title-related expenses.

Don’t rush to a decision. If you’re still not sure which mortgage type will be the most cost-effective for you, ask each lender you shop with to break down the costs for a comparison.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

TAGS: , ,

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Advertiser Disclosure

Mortgage

2019 FHA Loan Limits in Wyoming

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re looking to buy a house in Wyoming, you probably already know the state boasts the nation’s smallest population and the lowest population density. Its rural nature makes Wyoming the perfect place for homeowners who want to enjoy the natural wonders of the West without living right on top of their neighbors.Wyoming is also a state where homeownership is a reality for a large portion of the population: The U.S. Census Bureau estimates that more than 69% of the homes in the state are occupied by their owners.

So how do you make your Wyoming homeownership dreams come true? One popular option is a loan backed by the Federal Housing Administration (FHA). Last year, 0.23% of the nation’s FHA loans originated in Wyoming, where buyers took advantage of the federal backing to access benefits like lower interest rates and smaller down payments.

But keep in mind that FHA loans are subject to limits on the amount you can borrow. Those limits change every year to keep up with housing prices across the country. This year, FHA loan limits have climbed in Wyoming, allowing potential buyers who qualify for an FHA loan to borrow up to $314,827 for a single-family home.

Wyoming FHA Loan Limits by County

County NameOne-FamilyTwo-FamilyThree-FamilyFour-FamilyMedian Sale Price
ALBANY$314,827 $403,125 $487,250 $605,525 $239,000
BIG HORN$314,827 $403,125 $487,250 $605,525 $139,000
CAMPBELL$314,827 $403,125 $487,250 $605,525 $228,000
CARBON$314,827 $403,125 $487,250 $605,525 $174,000
CONVERSE$314,827 $403,125 $487,250 $605,525 $207,000
CROOK$314,827 $403,125 $487,250 $605,525 $199,000
FREMONT$314,827 $403,125 $487,250 $605,525 $77,000
GOSHEN$314,827 $403,125 $487,250 $605,525 $159,000
HOT SPRINGS$314,827 $403,125 $487,250 $605,525 $157,000
JOHNSON$314,827 $403,125 $487,250 $605,525 $225,000
LARAMIE$314,827 $403,125 $487,250 $605,525 $243,000
LINCOLN$314,827 $403,125 $487,250 $605,525 $253,000
NATRONA$314,827 $403,125 $487,250 $605,525 $215,000
NIOBRARA$314,827 $403,125 $487,250 $605,525 $165,000
PARK$314,827 $403,125 $487,250 $605,525 $241,000
PLATTE$314,827 $403,125 $487,250 $605,525 $175,000
SHERIDAN$314,827 $403,125 $487,250 $605,525 $253,000
SUBLETTE$314,827 $403,125 $487,250 $605,525 $235,000
SWEETWATER$316,250 $404,850 $489,350 $608,150 $259,000
TETON$726,525 $930,300 $1,124,475 $1,397,400 $789,000
UINTA$314,827 $403,125 $487,250 $605,525 $206,000
WASHAKIE$314,827 $403,125 $487,250 $605,525 $173,000
WESTON$314,827 $403,125 $487,250 $605,525 $184,000

How are FHA loan limits calculated?

FHA loans are backed by the federal government, and it sets the loan limits.

The government sets a floor limit, which is the maximum amount that buyers are allowed to borrow in areas deemed “low cost.” It also sets a ceiling limit, the maximum amount an eligible buyer can access in an area that’s considered “high-cost.”

The FHA bases its figures on the conforming loan limit — the biggest loan that Fannie Mae and Freddie Mac will buy — with the floor set at 65% of the conforming loan limit, and the ceiling at 150%.

All 23 counties in Wyoming are considered low-cost, and therefore have the loan limit of $314,827.

These are the limits that the FHA has set for low-cost areas across the United States this year:

  • One-unit: $314,827
  • Two-unit: $403,125
  • Three-unit: $487,250
  • Four-unit: $605,525

These are the limits set for high-cost areas across the USA in 2019:

  • One-unit: $726,525
  • Two-unit: $930,300
  • Three-unit: $1,124,475
  • Four-unit: $1,397,400

Are you eligible for an FHA loan in Wyoming?

Of course, just buying a house in Wyoming won’t guarantee you a $314,827 mortgage, nor does it grant you access to an FHA loan. There are requirements to meet regarding your credit score, debt-to-income ratio and other factors. You can find out more in MagnifyMoney’s complete guide to FHA loans.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jeanne Sager
Jeanne Sager |

Jeanne Sager is a writer at MagnifyMoney. You can email Jeanne here

TAGS:

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply