Buying a home is a big step, and it can be complex. For most, the biggest hurdles when buying a home are income and credit score. What income and credit score do you actually need for a mortgage? It may be more attainable than you think. Let’s take a closer look at what you really need to get a mortgage, and what type of mortgage you can get.
What Income and Credit Score Do You Need for a Mortgage?
You already know that the income that you need for your mortgage depends on the price of the house you want to buy, and the downpayment that you have. You might not know that the type of mortgage you get also plays a role. For the purposes of this blog post, we’ll focus on the two most common types of loans; government-backed and conventional.
Government-backed loans: FHA, USDA, VA
A government-backed loan is not actually provided by the government, but it is secured by a government agency, like the Federal Housing Administration (FHA), United States Department of Agriculture (USDA) or Veteran’s Affairs (VA). Each of these has slightly different requirements, but the most common is an FHA loan. We’ll use FHA loan requirements in this blog post. Keep in mind that the FHA secures the loan, but does not offer it; you’ll work with a bank or another lender.
A conventional loan follows guidelines set by Fannie Mae and Freddie Mac, which are publicly traded companies that are regulated by the government. Conventional loans are also offered by private lenders, but the requirements are different. There are different types of conventional loans, such as adjustable rate mortgages (ARMs) and jumbo mortgages, but we will deal with the most common type, a fixed-rate mortgage.
What Income Do I need for a Mortgage?
Let’s start with income. Both government loans and conventional loans have income requirements. Income requirements can increase or decrease depending on other factors, like your credit score (which we’ll cover later), monthly mortgage insurance payments, and your down payment amount. We’ll explain these in more detail for each mortgage type.
FHA Loan Income Requirements
Let’s say you want to purchase a $100,000 house. How much income will you need to obtain an FHA loan?
FHA loans require a downpayment of at least 3.5%. Also, your debt-to-income ratio cannot exceed 43%. This means your combined debt, including all housing expenses (property taxes, insurance, mortgage payments) and other debts (student load debt, car loans, credit card debt etc), cannot exceed 43% of your gross monthly income. Lastly, you must pay monthly mortgage insurance payments in addition to home insurance.
So what does this mean for your income? To start, you’ll need at least $3,500 saved for a down payment on your $100,000 house. At a 4.5% interest rate and a 30 year loan, using rough estimates for taxes, home insurance, and mortgage insurance, your monthly payment works out to about $700. Let’s say you have $200 in other monthly expenses as well. This means you’ll need a gross monthly income of about $2,093 for an FHA loan, which is $25,116 a year.
You can calculate your own monthly payment using our monthly mortgage calculator. You’ll have to add PMI, which is around .8% of your purchase amount annually, and then add any additional monthly debt payments. To see how much monthly gross income you would need, divide your total monthly payments by .43. (900 / .43 = $2,093)
Conventional Loan Income Requirements
Conventional loans work similarly. You’ll need at least a downpayment of 3%, and lenders may require as much as 20% down, depending on your credit score. Your maximum debt-to-income ratio will be 45%, with exceptions for very good credit scores. If you put 3% down, you’ll be required to pay PMI, as with the FHA loan, but you won’t have to pay PMI if you pay 20% down.
So, our scenario changes only slightly with a conventional loan. You’ll need at least $3,000 for a downpayment and, assuming our loan terms, other estimations and debt remain the same, you’ll be able to carry slightly more debt, so you’ll need slightly less monthly income, $2,000 a month or $24,000 annually.
Keep in mind that these are the minimum requirements, and these example numbers are estimations. To make sure you can afford this loan amount, it’s a good idea to factor in your home budget as well, and make sure you have enough monthly income left over after income taxes for everything else that you need. Also, remember that your specific loan terms, especially your interest rate, will also vary by your credit score.
What Credit Score Do I Need for a Mortgage?
As previously stated, your credit score will determine some aspects of your loan terms. Keep in mind that the details of your credit score, such as late payments, as well as your employment history and bankruptcy record will also play a role. Your credit score will also play a role in determining your interest rate. You can improve your credit score by consolidating and paying off debt, and making payments on time.
FHA Loan Credit Score Requirements
Borrowers can have a credit score as low as 500, but to qualify at that level, you’ll need at least 10% down. To qualify for the 3.5% minimum down payment, you’ll need a credit score of at least 580.
Conventional Loan Credit Score Requirements
To qualify for a conventional loan, you’ll need a credit score of at least 620, though many lenders require at least 640. If you want to work with a higher debt-to-income ratio of 50%, you’ll need a credit score of 700.
If your credit score or income aren’t yet up to loan term limits, make a plan for improvement. Talk to a financial advisor about consolidating your debt and improving your credit. Take a look at your monthly budget and see if you can make any cuts so you can save up for a down payment. With patience and careful planning, you can start looking for a home sooner than you think.
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