What mortgage can I get approved for? Fannie Mae found most Americans overestimate the credit score and down payment necessary to qualify for a mortgage.
Credit scores and lending requirements are confusing – even to those of us who work in the credit industry or those that are tangentially related, like mortgage origination or banking. So it comes as no surprise that most Americans still don’t know mortgage lenders’ credit score, down payment, or debt-to-income ratio requirements, according to research by Fannie Mae.
The average American assumes the qualifications for taking out a mortgage are stricter than they really are, which isn’t such a bad thing since it means they’ll have higher credit scores and bigger down payments when they do apply for a mortgage. Still, it’s helpful to know how your finances stack up against mortgage lenders’ standards and requirements and how you can improve them to get a better loan at a more advantageous interest rate.
Minimum Credit Score to Get Approved for a Mortgage
The minimum credit score lenders require to take out a mortgage loan is 580. More than half of Americans didn’t know that was the minimum credit score required or estimated a much higher score of 650. While 580 is the minimum credit score lenders require, it’s true that many lenders will not approve a loan to someone who has only a 580 credit score. It’s also true that having a higher credit score could save you thousands over the life of the loan.
“If you plan to buy a home in the near future, there are steps you can take now in order to improve your credit score over time,” says Ilyce Glink, publisher of ThinkGlink.com and author of many books on real estate including 100 Questions Every First-Time Home Buyer Should Ask. “Regularly check your credit report so you know where you currently stand, and dispute any inaccurate or outdated information. Over time, positive credit activity can help you improve your credit score and also help you qualify for a better interest rate.”
How Much of a Down Payment Do I Need?
Americans assume the minimum down payment required to qualify for a mortgage loan is 10 percent when in actuality it’s only 3 percent. Of course, it’s always better to make a higher down payment when you can (if you get to 20 percent down you’ll avoid private mortgage insurance (PMI) which is expensive) and it’s good news that the average home buyer now prefers to make a larger down payment.
Shockingly, only 1-in-4 Americans are familiar with low down payment programs. Down payment assistance programs exist at the federal, state, and local levels and help first-time buyers with good credit and average or slightly less than average income. There are thousands of down payment assistance programs available across the nation. A bit of research with your state, county and municipal housing authorities can help you identify which programs you might be eligible for and lessen this big financial barrier to buying your first home.
What Debt-to-Income Ratio Do I Need to Qualify for a Mortgage?
More than 60 percent of Americans didn’t know what debt-to-income (DTI) ratio lenders require and those who took a guess assumed 40 percent is the maximum DTI ratio for mortgage approval. Fifty percent is the actual maximum DTI ratio lenders require. But that’s 50 percent of your gross monthly income (which feels a lot more like 60+ percent of your take-home pay.
When applying for a mortgage, always remember what the bank approves you for and what you can really afford are two very different things.