What score will you need to qualify for a home loan? Most lenders require a credit rating of at least 620 to qualify for most loans. In general, a score above 720 will allow you to get the best loan terms. In general, to qualify for a home loan, you'll need good credit, a history of paying your bills on time, and a maximum debt-to-income ratio (DTI) of 43%. Today, lenders generally prefer to limit housing expenditures (principal, interest, taxes, and homeowner's insurance) to approximately 30% of borrowers' monthly gross income, although this figure can vary widely, depending on the local housing market.
Lenders want to know that you will be able to handle the debt you already have, in addition to paying off your new mortgage. An important metric is your debt-to-income ratio (DTI). It's a good rule of thumb if your total monthly debt (including your mortgage payment) doesn't exceed 36% of your monthly gross income. The Consumer Financial Protection Bureau (CFPB) reports that a maximum DTI ratio of 43% is required to receive a qualifying mortgage, which is considered safer for lenders.
While credit scores as low as 500 may qualify you for certain mortgages, most lenders expect a score of at least 620 to 680 to consider your application. The amount you'll deposit in your home depends on the type of mortgage you receive. However, the typical down payment on the mortgage ranges from 3.5% to 20%. Essentially, the higher your down payment, the lower the risk to a lender.
Lenders assume that buyers who invest more cash upfront are less likely to walk away from the money they have in their home. When you put in less than 20%, lenders often mitigate that risk by charging private mortgage insurance (PMI), which is an insurance policy that protects the lender in the event of a default on your loan. Appraisals determine the value of the property. If you are using a mortgage to buy your new home, your lender will order an appraisal to make sure that the home is worth the money you lend to you.
