When applying for a mortgage, lenders look at both your credit score and the accounts you have reporting when making a decision.
First check with your mortgage lender to see what credit score model they are using and the minimum score required. On average most lenders require a 630 credit score or above. Some lenders use only 1 credit bureau and others may use all 3 (Equifax, Transunion and Experian) when checking your score. We recommend Myfico.com their service will provide several different score models for all 3 Credit Bureaus.
Mortgage lenders also look at what items are reporting on your credit file when making a decision. In most cases your credit score may qualify you, but certain items reporting on your credit file may not.
Debt-to-Income Ratio or DTI- Most lenders like to see a debt-to-income ratio lower than 35%. To calculate your debt-to-income ratio you would divide your monthly debt by your monthly income. For instance if your monthly income is $8,000 and your monthly debt is $2,000, your DTI $2,000 ÷ $8,000 or 25%
Late payments- A late payment in the last 12 months will cause an automatic denial for majority of lenders. Some do have exceptions under certain circumstances such as a life changing event that occurred during the time the account was past due.
Collections- Having collections reporting can definitely weigh down your score down. Certain collections will also cause a credit denial. If you have have a collection for a utility bill such as cable, cellphone or insurance this will cause most lenders to deny you. Also any rental property collection or collection resulting from an unpaid credit card or loan is grounds for denial.
Charge Offs- Any unpaid charge off will drop your credit score and will also cause an automatic denial.
Repossession- A repossession is another item that will cause your mortgage application to be denied.
Applying for a mortgage can be an easy process or in some cases nerve wrecking. Always check your credit file first and ask what the approval requirements are from the mortgage lenders. If you have any questions about your credit report you can schedule your FREE credit consultation and score analysis today.