Qualify for a Home Loan & Improve Your Credit Score
FHA loans may be the most popular government-backed home loan, but conventional loans are still the most common. You can get them from almost any lender, as long as you qualify.
Here are the minimum requirements to qualify for a conventional mortgage:
The minimum down payment with a conventional mortgage is 3%. There is no minimum borrower contribution, which means you can use gift funds or a grant toward your down payment as long as you’re buying a single-family home that will be your primary residence.
You typically need a credit score of at least 660 if you’re putting less than 25% down and a score of 620 or more if you can pay 25% or more in a down payment.
You might be able to qualify for a home loan with a DTI ratio as high as 45%, but Freddie Mac advises borrowers’ DTI be no greater than 36%.
Lenders typically require borrowers who put down less than 20% to buy private mortgage insurance. Instead of paying PMI, you might be able to get an 80-10-10 loan where you put down 10%, get a first mortgage for 80%, and get a second mortgage for the remaining 10%.
But what if you don’t have great, or even good, credit? You may want to focus on getting your credit score up before trying to secure a home loan.
Here are some ways you can increase your credit score:
Build Your Credit File
If you have no lines of credit to your name, you can’t begin building good credit. Apply for a credit card, or, if you can’t get approved for one, see if you qualify for a credit-building secured card. Getting added as an authorized user on someone else’s credit card can also help, assuming they use the card responsibly.
Don’t Miss Payments
Don’t miss loan or credit card payments by more than 29 days—payments that are at least 30 days late can be reported to the credit bureaus and hurt your credit scores.
Pay Down Revolving Account Balances
Even if you’re not behind on your bills, having a high balance on revolving credit accounts can lead to a high credit utilization rate and hurt your scores. Revolving accounts include credit cards and lines of credit, and maintaining a low balance on them relative to their credit limits can help you improve your scores.
Limit How Often You Apply for New Accounts
While you may need to open accounts to build your credit file, you generally want to limit how often you submit credit applications. Each application can lead to a hard inquiry, which may hurt your scores a little, but inquiries can add up and have a compounding effect on your credit scores. Opening a new account will also decrease your average age of accounts, and that could also hurt your scores.
If you are ready to buy or sell your home, contact Berkshire Hathaway HomeServices to speak to one of our real estate agents at 803-775-1201 or visit our website to learn more.