The Federal Housing Administration (FHA) loan is often referred to as a first-time homebuyers' loan,…
With a 700 credit score, you’re probably the envy of some of your neighbors.
A credit score of 700 is more than enough to fulfill the minimum credit score requirements of most mortgages you will find in the market. There’s no better time to buy a house when you find yourself in this position. However, it is important to remember that your credit score is not the only factor mortgage lenders look at to give you a loan.
Do you know your debt-to-income ratio? Do you have stable employment? How much savings have you been able to put away? These are just some other factors that will be of great significance to your mortgage loan application.
In this article, we’re going to discuss some of the other ingredients for mortgage approval, as well as the loan options you might want to consider when you buy a house.
What to prepare when you want to buy a house
Minimum Credit Score
It goes without saying that you must meet a particular credit score level before you even want to apply. But did you know that once you apply, the lender requests for your credit report from the bureaus, and this will actually pull down your score? It’s true. This is what you call a hard inquiry.
Every time you apply for a loan or a credit card, this affects your score negatively because one component of your score is new credit. This impacts your score in a bad way because this shows that you are looking to borrow more money despite the credit lines you already have. Therefore, the more you apply at institutions and the more new accounts you acquire, the more points you can actually lose.
Take note that you should also keep your credit utilization below 30 percent. This is basically the average percentage of your accumulated credit limits that you’ve used in one billing cycle. If you’re always using up way too much of your credit line, this doesn’t present a good picture of your borrowing habits.
If you have a lot of debts, of course, you must generate a lot of income. Whatever you do, though, a portion of your earnings will keep going to your debt payments, so the only real budget you have in the end is the money left after your bills have been paid.
This is why lenders will want to compute for and find out your debt-to-income (DTI) ratio.
To compute your DTI ratio, you don’t have to consider utility bills, subscriptions, and other similar dues. The only bills that will matter are those included in your credit report, so there are student loans, maybe car payments, and definitely credit card debts. You need to add up the minimum amounts you must pay off for the month for our computation.
After you add these debts up, you then divide the sum by your gross monthly income. The number you come up with (multiplied by a hundred) is what you call your DTI ratio.
Ideally, you will want to keep this number below 36 percent. Remember, once you have a mortgage, this is another debt that will weigh heavily on your monthly income, so you want to be conscious of how much money will be left once you start paying your mortgage.
Since you’re planning to get a home loan, you will want to boost your monthly earnings.
Now, many people would prefer not even to make a down payment, and this is actually possible depending on your mortgage type. But whether or not you pay money down, mortgages will have closing costs, so you have to fork over the cash anyway.
Furthermore, the lower the down payment you make, the more expensive your mortgage will get. This means you’ll be paying a higher interest overall, and if there’s mortgage insurance for your loan, this is another monthly charge you’re going to have to pay for that will not benefit you in any way.
Finally, you want to consider your job history.
It really matters to lenders whether you show the consistency of behavior to at least be able to stay at one company for 2 years or more. After all, mortgages are huge responsibilities you have to keep for decades at a time, so if you can’t even stay at one job for a year, this rings all sorts of alarm bells to mortgage lenders.
This will also show lenders how stable your income is. Sure, you might have a good credit score now or a good DTI ratio, but what about tomorrow? What about next year? What is your income trajectory, and where do you actually base your earnings from? These are some of the questions they’ll want answers to when they look at your application.
700 Credit Score Home Loan Options
So which types of mortgages would you most likely qualify for with a credit score of 700?
The short answer, basically, would be all.
Honestly, a 700 credit score is a really great score to have. If we’re talking about your FICO Score, this is in the Good range, and you’re actually just 150 points away from the highest score you can get.
There is only one loan type you might not qualify for, and it wouldn’t even be your fault. It’s just that different loans have different requirements, and the same goes for lenders.
Let’s look at your mortgage options below.
If you’re buying a house in a less populated area, usually, the ideal home loan to get is the one insured by the U.S. Department of Agriculture. They guarantee rural housing loans to encourage more people to move out of the cities and stimulate smaller economies.
The USDA loan doesn’t actually have a minimum credit score requirement, but with a 700 credit score, you would most likely get through the door. However, this is not to say that you might find its benefits attractive since it limits your home buying options, and you can get other loans anyway.
One of the benefits of a USDA loan is not having to make any down payment. In addition, since they want to encourage more people to live in rural areas, this type of loan is more attainable for people with low to moderate incomes.
Oftentimes referred to as a first-time home buyer’s loan, newbie buyers are indeed the target of this mortgage insured by the Federal Housing Administration. However, it doesn’t have to be your first time buying a house to qualify for a loan. You need to satisfy the minimum credit score of 500, which you more than already accomplish with a 700 credit score.
Clearly, the benefits of FHA loans will no longer speak to your own needs, which is why we’re just mentioning it here to let you know why you would be better off getting the next loan type we’ll discuss after.
You will indeed get the benefit of paying as low as a 3.5% down payment on your loan (depending on your credit score) with an FHA loan, but the downside of this deal is you have to pay for what’s called mortgage insurance for the whole life of your loan. There’s no taking this extra charge out of your monthly payments no matter what you do, so for your sake, it’s better to skip this mortgage for another one.
Now, if we’re talking about the home loan that would probably be best for you with a 700 FICO Score, what we would highly recommend getting is a conventional loan. The minimum credit score for this one stands at just 620.
We’ve mentioned USDA and FHA loans, and these are what you would call government-backed loans because government agencies guarantee them, and they tend to be a lot more forgiving when it comes to credit scores.
On the other hand, conventional loans are what you call traditional loans because private institutions insure them. You can use them for whatever purpose, whether you’re looking for a house that you want to rent out or a place to stay during the summer. It doesn’t have to become your primary residence, unlike government-backed mortgages.
For conventional, the higher your credit score, the higher the loan amount you can get. You can also get a better interest rate and generally just more negotiating power. You can also put as low as a 3% down payment, although what’s going to be ideal is a 20% down payment so that you can skip mortgage insurance completely. If you can’t afford 20%, it’s still okay because once you gain 22% home equity, they stop charging you for this monthly.
Last but not least, we want to make sure that we mention VA loans. These are mortgages guaranteed by the Department of Veterans Affairs, and it’s possible that you might not qualify for them because you have to be a service member or eligible spouse to be considered. But if you are, anyway, you are most likely a shoo-in for this because the minimum credit score required is just 640.
There’s just no question about it. If you can qualify for a VA loan, it’s the only one you should get. There’s zero down payment required here if that makes you happy, and there’s also no mortgage insurance, regardless if you make a down payment or not. The mortgage rates are also the best in the industry.
As far as mortgages are concerned, lenders will most likely fall in love with you with a credit score like this.
Once you have chosen what kind of mortgage you want to get through, here’s where the other factors come into play. You have to watch your DTI ratio, and you’ll want to impress with your job history. Finally, as much as possible, pay whatever you can for a down payment.
And that’s it! We hope you enjoy your mortgage journey, and if you have more questions, you know where to find us. Have fun shopping for your new house!