If you’d like to buy a house but first want to know if your credit is good enough to get a mortgage, you’re in the right place. When it comes to mortgages and credit reports, the two go hand in hand. However, there’s much more to it than that.
While your income isn’t directly reported on your credit report, it’s definitely the biggest factor when it comes to determining mortgage eligibility.
Income from employment isn’t the only type of income that can be considered when you apply for a mortgage. Social Security, annuities, pensions, VA disability, self employment, investments, earned interest, alimony, and even child support (in addition to some other regular income types) can be included in a person’s total income on their mortgage application.
Your income will help you and your lender decide how much of a house you can afford. Combine that with your current debts owed and this is how a pre-approval for a specific home value amount is issued.
Credit score is a large part of the equation when it comes to determining if your credit is good enough to get a mortgage. Since there are three major credit bureaus– Experian, Equifax, and TransUnion– we take the middle score to determine the score requirement we’d need for a mortgage. In other words, if you have a 650 credit score on Experian, a 620 on Equifax, and a 670 on TransUnion, we would utilize the middle score–Experian’s 650– as the score we would need to process your mortgage and determine loan eligibility.
Speaking of eligibility, it is a good rule of thumb that the middle credit score must meet a minimum requirement of 620. There are loan products such as FHA loans and VA loans that have minimum credit score requirements of just 580, so even if your score is lower than 620, your credit score may be OK to get a mortgage.
Debt to Income Ratio
The amount of your current debts and your income plays a large role in determining if your credit is good enough to get a mortgage. One of the biggest factors when it comes to determining mortgage eligibility is called the “debt to income ratio,” or DTI.
The debt-to-income-ratio is a percentage expression that is calculated by determining your current monthly debts owed and weighing them against your monthly income. Debts that have recurrent monthly payments, such as credit cards, student loans, personal loans, car loans, and mortgage loans are all part of what is used to determine your debt to income ratio.
For example, lets say you have a $300 monthly car payment, a $400 student loan payment, and $300 in credit card minimum payments each month, totalling $1000 in debt payments. If you make $3,000 per month, this means that your current debt-to-income ratio is 33%.
In most cases, if your credit is good enough to get a mortgage, you will need to have a debt-to-income ratio of less than 36%. However, some loan products may allow for a debt-to-income ratio of up to 43%.
If your personal debt-to-income ratio exceeds the maximum allowed for a specific loan type, you are less likely to have a situation where your credit is good enough to get a mortgage. The good news, however, is that sometimes it takes only modest adjustments to move your debt-to-income ratio into the acceptable range.
Collections, Bankruptcies, Liens, and Judgments
A credit report shows much more than payment histories and credit card balances. If you’ve had credit problems in the past or have collections, a bankruptcy, liens, or a judgment on your credit, it could affect your ability to get a mortgage.
However, many home loan programs, such as FHA and VA, are somewhat forgiving when it comes to old credit flubs that may appear on your report. In general, the older a negative mark on your credit, the less it’ll affect your ability to get a home loan.
In some cases, however, collections will need to be paid off before you can be sure your credit is good enough to get a mortgage. Bankruptcies that have been discharged and have aged several years can be worked around in some cases. As a general rule, your Personal Mortgage Advisor will go over your credit report with you and discuss anything that looks potentially problematic and let you know what to do about it.
A Case by Case Basis
When it comes down to it, the best way to know if your credit is good enough to get a mortgage is to have an NLC Loans Personal Mortgage Advisor take a look at it. Every single home loan application is different, and there is no one-size-fits all mortgage with one-size-fits-all credit terms. Many factors affect a person’s creditworthiness, so when it comes to mortgages, we must take credit on a case by case basis in most instances.
Ready for an easy, no-strings-attached mortgage evaluation? Call us toll-free at 877-480-8050 and speak to a Personal Mortgage Advisor who will take the time to look at your complete financial situation, including your credit profile, and let you know where you stand in terms of purchasing a home. You may be closer than you think!