Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
The different needs and circumstances of borrowers call for varied types of home loans. For example, there are traditional mortgages you can get from private lenders if you have above-average qualifications. Otherwise, you can depend on government-backed loans if you don’t have enough savings or have bad credit.
Do you know if your credit score will get you approved for mortgage loans?
In this article, we will discuss some of the criteria mortgage lenders use to determine loan eligibility. We will also list down the home loan options you can choose from with a 635 credit score.
With the level of heat in the real estate market today, you will want to ready yourself for any situation to get the most savings from your home purchase.
Preparing Your Application
Before you even start shopping around for a new home, it’s worth taking care of a pre-approval. First, you want to have a good idea of your budget because, at this point, a mortgage lender can already tell you how much you will be capable of borrowing and paying back every month.
In the worst-case scenario, you can find the perfect home, but once you apply for the mortgage, the lender might say that you are not eligible to borrow this kind of money. Maybe you don’t meet credit score requirements, or the interest rate is too high. Whichever the case, a rejection can be heartbreaking, so you should avoid this at all costs.
Getting a pre-approval can also serve as a financial check-up to find out whether you are home-ready. Once you have this pre-approval in hand, you can use this as you negotiate with a house seller as proof that you already have a lender’s confidence.
Note that pre-approval letters usually have an expiration date 60-90 days after creation in case of any negative updates on your credit history and score. A pre-approval also affects your credit score as much as the real application does, so it is normal to notice a few points taken off your score even if you haven’t even taken on the new loan.
1 – Minimum Credit Score
Each mortgage and each lender have minimum credit score demands from a borrower. In general, you want to have a Good FICO Score (starting at 670) if you’re going to make the most out of a mortgage, but minimum credit score requirements usually ask less than this number.
Everyone is legally entitled to get a free credit report. However, you can only take advantage of this once a year, and for the rest of the time, you have to find other ways of tracking your credit progress.
Although there are some free tools online you can use to keep abreast of your score, the rating you’ll see may not be as accurate as the one loan officers will view once they pull your credit report. It’s up to you if you are willing to pay to get your most up-to-date credit reports from each of the three credit bureaus, but it’s generally easier to preserve your confidence by keeping great financial habits.
Some of the sure ways to get good credit are:
- paying your bills on time,
- using less than 30% of a credit card’s limit every month,
- keeping your oldest credit accounts,
- and infrequently applying for new credit.
Uncontrollable factors will also hinder you from getting higher credit, so don’t put yourself down when you realize you cannot improve your score. There’ll be more chances!
2 – Down Payment
There are only a few types of mortgages that will not require you to make a down payment; putting money down is the norm for a home loan. It will also give you a better schedule for homeownership and save you a lot in mortgage interest and cost.
If you’ve been saving for this very day and you value every dollar, we recommend that you pay at least 20% of your home’s purchase price upfront. This will assure the lender, especially if you are asking for a large loan amount.
On the other hand, if you don’t have enough money for 20 percent, you can opt to pay as little as 3 percent, depending on the minimum down payment asked for your mortgage.
In some cases, your credit score can also play a role in determining how much you should deposit for a down payment (see FHA loan below).
3 – Debt-to-Income Ratio
Another term that you want to familiarize yourself with once you start applying for a mortgage is your debt-to-income ratio or DTI ratio.
It is generally understood that you will source your mortgage payments from your existing income. So whether you’ve received an inheritance or have a certain amount of savings that you can use to pay your monthly amortization, your DTI ratio will be based on your salary.
Here, you can imagine your income as a pie where each slice represents the different debts you owe and your other expenses. The percentage represented is the amount of money that goes into paying back your debts every month. To get a better chance of qualifying for a mortgage, you want to keep your DTI ratio less than 40 percent.
If you want to improve your DTI in the months leading to your mortgage application, you can take care of this by making more money, paying down your debts, or doing both. The lower your DTI ratio, the happier your lender.
4 – Employment
People get mortgage loans for several reasons, sometimes even when they’re capable of buying the house in cash. If you have savings in the bank, this will certainly look great for your application, but lenders will still prefer to know that you have a strong employment background. In some ways, a mortgage application can feel like you’re interviewing for a new job.
Since it is assumed that you will be using your future income to pay for your home loan, lenders will want to know how much you make and how long you’ve been staying where you work. As a tip, we can advise that it’s better to have at least two years of stable employment to make lenders feel that there’s a higher chance you’ll maintain the same kind of salary, if not more.
635 Credit Score Home Loan
Now let’s talk about what you’ve come here to find out!
Note that with 635 credit, you qualify for the loans we’ll be mentioning below. However, credit score requirements vary per lender, so it’s better to do your research before handing in your application.
Minimum FICO score: None
Backed by: Department of Veterans Affairs
The VA loan benefits our service members and veterans because it doesn’t ask for a minimum down payment. The VA guarantees 25 percent, so lenders are incentivized to give better mortgage rates and forgo mortgage insurance.
Minimum FICO score: None
Backed by: U.S. Department of Agriculture
The USDA loan is frequently referred to as a rural housing loan because you can only get this if you’re buying in a USDA-approved rural location. Like the VA loan, there is no money down needed.
Although there is no preferred minimum credit score, one major requirement you want to satisfy is the household income which must not exceed 115% of your area’s median income.
Note that since you have 635 credit, the underwriter will ask for more information on your credit background, so as early as now, you’ll want to consolidate all your expense receipts to prepare for your application.
Minimum FICO score: 500 / 580
Backed by: Federal Housing Administration
Otherwise known as a first-time homebuyers’ loan, the FHA loan is the most accessible government loan for all Americans because, with a minimum credit score of 500, you’ll be eligible to apply. A 500 FICO Score will get you in the door; however, this will require you to make at least a 10% down payment.
As you have a 635 credit score, you are qualified to make as little as 3.5% down on an FHA loan, but if you choose to pay the minimum 10 percent, you can say goodbye to mortgage insurance after eleven years. Otherwise, insurance stays in your monthly amortization for the life of the loan.
Minimum FICO score: 620
Backed by: Private lender
If you don’t want to worry about mortgage insurance, you need to have at least a 20% down payment ready for a conventional loan. The minimum credit required varies per lender, and 620 is the absolute lowest score they’ll approve. So it’s better to wait a month or two to increase your credit first before applying for this type of mortgage.
There are also different kinds of conventional loans, depending on how much money you need to borrow. For example, if the amount you seek exceeds Fannie Mae and Freddie Mac loan limits, you might need a jumbo loan that asks for a minimum 680 credit score.
Choosing the Right Mortgage
Finding the best mortgage for your situation is no piece of cake because to do this, you might have to look inwardly to ask the right questions. But as long as you know what you want and exactly what you need, you are sure to arrive at the most suitable decision to finance your dream home.
Getting the Help of a Mortgage Broker
If the mortgage application process feels too complex and inconvenient for you at the moment, consider tasking a mortgage broker for this search.
A mortgage broker or advisor could do all of the legwork needed so that you don’t even have to leave your current home to facilitate the process. In addition, with their experience, they will already have access to industry information that will help you save a lot of money.
If you have more questions or need more information, please don’t hesitate to contact us.
Best wishes on your mortgage journey!