When you apply for a mortgage, your lender will look at your entire financial picture to determine whether or not you qualify. This vetting includes a review of your credit history, employment, the funds you have availabl to purchase a home, and more. These factors will ultimately determine the type of loan and interest rate you qualify for. But just what does a lender look for on your credit report? Knowing that somebody is going through your records with a fine-toothed comb can be a little intimidating, but we’re here to give you a heads up on what a lender is looking for when they review your credit report.

Credit History

The most important factor lenders look at when analyzing your credit report is your credit history. This shows how well you’ve paid your bills, like credit cards, student loans, and auto loans. If you take care of your financial obligations on time and don’t use all the credit available to you, lenders will look more favorably on your application as it’s a sign that you can responsibly handle your credit.

Lenders will also check to see if you have any recent significant derogatory events on your credit report. A significant derogatory event is any single event that may give the lender cause to consider you a high risk for future default. Examples of significant derogatory events include bankruptcies, foreclosures, deeds-in-lieu of foreclosure, pre-foreclosure sales, and short sales. If you have any of these events on your credit report, you’ll probably have to wait a while before you can apply for a new mortgage. These waiting periods are usually between two and seven years, depending on the circumstances.

Debt-to-income Ratio

Also found on your credit report, your debt-to-income ratio is one of the most important things that lenders pay attention to when considering you for a mortgage. Your debt-to-income ratio (DTI) tells them whether your income can cover your mortgage payments and other debts (such as credit cards, student loans, auto loans, and other obligations). Your DTI puts a quantitative value on your ability to pay back your loan. The higher your DTI, the more likely it is that you will not qualify for the mortgage amount you applied for. Think of it this way: if your total income cannot cover your monthly expenses and leave you with some spending money for things like groceries, gas, and entertainment, then it could be difficult to make your monthly mortgage payments. Lenders look at your DTI in two ways:

Housing Ratio: This is your gross monthly income divided by your proposed monthly housing expenses (your mortgage payment, including principal, interest, taxes, insurance, and homeowners association dues, if applicable). The limit for this ratio is typically around 26% to 28%.

Total Debt Ratio: Your gross monthly income divided by the sum of all your recurring debt payments (such as student loans, auto loans, credit card payments, etc.) including your proposed housing expenses. This limit is typically around 43%.

One of the most important things that lenders pay attention to when considering you for a mortgage is your debt-to-income ratio.

Payment History

At the end of the day, your lender is lending you money with the intention of getting paid back. That being said, they want to see that you have a track record of not only making payments, but making them on time. A major determining factor in your credit score is payment history, which accounts for about 35% of the total score. Late or missed payments, especially on your mortgage, or a past bankruptcy are all considered red flags to lenders—because nobody wants to loan money to someone who won’t pay them back. That doesn’t mean that a few minor late payments will stop a lender from giving you a loan, but you may be either approved for a smaller loan or your interest rate may be higher than that of someone who has never missed a payment.

New Accounts

It’s always good to have an established credit history. However, opening a bunch of new credit card accounts in a short period of time may cause your credit score to drop and the lender to question if you are having trouble managing your finances. It may be tempting to put new appliances and furniture on new credit cards, but be patient. You’ll have plenty of time to buy things for your new house after you close.

Stable Employment

Another important indication of your ability to repay is a record of stable employment, which can also be found on your credit report. Lenders will look at how long you have held your current job and how long you have worked in your current profession. Having a stable job lets your lender know that you have a dependable source of income to repay your mortgage. Moving jobs frequently may affect your ability to be approved for a mortgage, especially if those job changes are not consistent for your industry.

Did this blog post help you prepare for the pre-approval process? We want to know! Tell us on social media!

The post What Are Lenders Looking for on My Credit Report? appeared first on Cardinal Financial.

The good news is that while some credit challenges may not be your fault, there are a few things you can do about them. Let’s break down what you can control when it comes to building the credit you need to become a homeowner.

Which credit challenges have the biggest impact on my score?

Factors that affect your credit score fall into five categories:

1. Payment history
2. Amount owed
3. Length of credit history
4. Credit mix
5. New credit

The majority of your credit score is based on your payment history and how much of your credit you use, so these are usually the categories where most borrowers run into credit challenges.

What steps can I take to handle credit challenges?

No matter which credit challenges you’re affected by, there’s no denying how much a low credit score can set you back in your homeownership journey. Some aspects of your score may be beyond your control as an individual, but we rounded up some key steps you can take to get your credit score as healthy as it can be in spite of any external factors.

Check your credit report

You can request your credit report once a year for free from each of the three major credit bureaus (Equifax, Experian, and TransUnion—follow the Federal Trade Commission’s instructions here). Once you receive your report, look for any errors that can be disputed and potentially removed from your record. These could include:

• Incorrect personal information, like your name and address
• Incorrectly listed bankruptcies, foreclosures, and other negative marks on your record
• Accounts that aren’t yours
• Accounts that are yours but aren’t listed in the report
• Duplicate accounts
• Accounts listed as closed that are actually open, or vice versa
• Fraudulent activity

If you find incorrect information on your record, you can dispute the errors with the credit bureau you received the incorrect report from.

Make payments on past due and/or high interest accounts first

Chances are, you won’t be able to pay off all your credit at once (and you shouldn’t—no credit isn’t much better than low credit). For the biggest boost to your credit score, prioritize making payments on accounts that are past due or have a higher interest rate.

Limit hard inquiries

Hard inquiries come from lenders when you apply for a new line of credit or loan. So, if possible, avoid opening new lines of credit if you’re trying to repair the credit you already have (unless your score is low because you don’t have enough credit mix, in which case opening a new credit account could boost your score).

While you’re at it, try to avoid closing lines of credit just before applying for a home loan. It’s a bit surprising, but your credit score can be dinged for closing accounts too. That’s because when you close an account, you reduce the amount of credit available to you. This means the credit you’re using will automatically become a larger percentage of your total available credit

Can I buy a house with a low credit score?

If you had to have a perfect credit score to buy a house, we’d all be renting. While you may have less flexibility than a borrower with a higher credit score, there are a lot of great financing options you can still take advantage of:

1. FHA Loans
   Backed by the Federal Housing Administration, you could get approved for an FHA loan with a credit score as low as 580.
2. VA Loans
   If you’re a veteran, active-duty servicemember, or eligible surviving spouse, VA loans offer a lot of exclusive advantages including low interest rates and approval with credit scores as low as 580.
3. USDA Loans
   These loan types can be used for eligible rural properties by low to moderate-income households. They may be geographically limiting, but there are no fixed credit requirements for USDA loans. The limit will be set by your lender.

If possible, you should aim to make a higher down payment on your mortgage to offset your credit score. Another option is to get a cosigner for your mortgage to provide your lender with added security.

If you’re a first-time home buyer, you could also qualify for financial assistance from the Department of Housing and Urban Development. You can find more information on how to qualify here.

What will homeownership look like for me while I’m dealing with credit challenges?

Long (but hopefully not too long) story short, a low credit score isn’t the end of the line when it comes to buying a house. A good lender will look at the full picture and work with you to build a home loan that meets you where you are, and sets you up to grow your finances for the next step in your homeownership journey. When you’re ready to explore your options, we’re here to help.

Some credit challenges may be out of your control, but there are still steps you can take to cultivate your credit score and qualify for the home financing you deserve.

The post Common Credit Challenges and What You Can Do About Them appeared first on Cardinal Financial.

Feared by many and flaunted by some, credit scores are a necessary evil when it comes to buying a house. But your credit score isn’t just for getting a mortgage—it paints an overall financial picture. If you didn’t know, your FICO credit score is a number between 300 and 850 that represents the likelihood of you being able to pay back a loan. The higher your score, the higher your creditworthiness and vice versa.

What Affects Your Credit Score? Here’s What You Need to Know.

So what does your credit score need to be to buy a house? If only it were that simple. Like so many others, the answer to this question depends on a number of different factors. There’s no set credit score that will ensure your ability to secure a mortgage loan. But if you play your cards right, your credit history and score should be good enough to where you won’t have a problem getting a loan for your home.

There’s no set credit score that will ensure your ability to secure a mortgage loan.

Just to be on the safe side

As I said earlier, it’s never as simple as “my credit score needs to be (insert number here) for me to be able to buy a house.” But if you insist on a numerical value, anything above 660 is generally accepted as a “good” credit score and shouldn’t cause you any problems when you’re applying for a loan.

The good thing is, there’s a plethora of options for people who fall short of that 660 mark as well. Depending on how low your credit score is, the better option may be to hold off on buying a home until you can shore up your credit report to get a better rate on your mortgage. If you’re not sure, talk to a loan originator for a better picture of whether you should pursue a mortgage with a low credit score.

The Credit Scale

What’s the credit scale and how does that impact me getting a mortgage?

Since you asked, here’s an approximate breakdown of the different tiers of credit scores and how they’ll affect your mortgage prospects. It’s important to remember that every case is different. This scale is not law and you won’t truly know where you stand until you talk to a mortgage professional about your specific situation.

• Excellent (760–850): Smooth sailing. Your credit score will have no impact on your interest rate. You will likely be offered the lowest rate available.
• Very good (700–760): Your credit score may have a minimal impact on your interest rate. You could be offered interest rates 0.25% higher than the lowest available.
• Good (660–699): Your credit score could have a small impact on your interest rate. This means rates up to 0.5% higher than the lowest available are possible.
• Moderate (620–660): Your credit score will affect your interest rate. Be prepared for rates up to 1.5% higher than the lowest available.
• Poor (580–620): Your credit score is going to seriously affect your interest rate. You may be hit with rates 2%–4% higher than the lowest available.
• Very Poor (500–580): Now you’re in trouble. If you are offered a mortgage, you’ll be paying a very high rate.

Depending on how low your credit score is, the better option may be to hold off on buying a home until you can shore up your credit report to get a better rate on your mortgage.

You’ve got options

How do I know what products to look at based on my credit score?

Good question. Our products page offers a brief rundown of the basic features of every loan we offer and what credit scores you’ll need to qualify for them. You can still check out the products page for a deeper dive into the ins and outs of each loan, but here are some highlights of our different program options.

Conventional

• The most popular loan in the country and the epitome of a basic loan.
• Put down as little as 3% for fixed-rate loans.
• Credit scores as low as 620 accepted.

FHA

• For people who need a little credit flexibility.
• Put down as little as 3.5%.
• Credit scores as low as 550 accepted.

USDA

• For people looking into rural properties.
• 0% down payment.
• Credit scores as low as 580 accepted.

VA

• A loan for veterans or active service members.
• 0% down payment.
• Credit scores as low as 550 accepted.

Jumbo

• A large amount loan for people looking into luxury homes.
• Put down as little as 10%.
• Credit scores as low as 660 accepted.

Let me reiterate that the terms of these mortgages are not set in stone. At Cardinal Financial, every loan is crafted specifically to fit each borrower’s unique financial picture. While these snapshots provide a general overview of our products, there may be some wiggle room once a loan originator knows the whole of your financial situation.

So now what?

Now that you’re a credit guru, you should have a better idea of what type of credit report it will take to qualify for a mortgage. You know the different types of mortgages and you know what’s generally considered to be “good credit,” but do you know your credit score? There are plenty of websites you can visit to get a free credit report. Be careful though, some sites offer Vantage credit scores but most top lenders only accept FICO credit scores. Be sure to know which one you’re looking at or you could get blindsided when it comes time to talk to a loan originator.

If you still have questions, don’t hesitate to call us! We’re more than happy to help you understand everything you need to know as you work toward homeownership!

Did you learn something new about credit from this blog post? We want to know! Tell us on social media!

The post What Does My Credit Score Need to Be to Buy a House? appeared first on Cardinal Financial.

Buying a home is a milestone event in anyone’s life. With it comes added responsibility, a sense of settling down, and in many cases, a family. Like any major event, the home buying process can come with some apprehension, especially amongst a Millennial generation that fears “getting old” like the plague. But buying a home should be an event you look forward to, not dread its arrival.

Yes, becoming a homeowner can symbolize a change in lifestyle for many, and it’s important to know if you’re ready for a home or not before you jump in. But many of the scary stories you hear about why you shouldn’t buy a home are unfounded myths. While you may not be ready to take the next steps toward homeownership just yet, we’re here to dispel these myths that may be holding you back for the wrong reasons and give you a better idea of whether you’re ready to take the leap.

Buying a home should be an event you look forward to, not dread its arrival.

I Need a Big Budget

Many Millennials are shying away from buying homes because they simply don’t think they have enough money for it. The astronomical budgets of the couples on home buying and remodeling TV shows have shook Millennials to their very core. Seriously. Most people who are getting ready to buy their first home don’t have the $500,000+ budgets that these TV couples have access to, and that’s fine. The U.S. Census Bureau reported median home prices around $290,000–$320,000 between 2016 and 2018. This means that half of the homes in the U.S. fall below this price point. There are plenty of homes that fit your price range, you’ve just got to look for them.

I Can’t Pay Off a Mortgage and Student Loans At the Same Time

According to research done by American Student Assistance, 83% of Millennial renters with student loan debt said their loans are keeping them from homeownership. Student debt can certainly be a hindrance in the mortgage process, but shouldn’t keep you from your goal of homeownership if you proceed through the proper channels.

For instance, if you’re part of a Federal reduced-payment plan, make sure your lender calculates your DTI ratio based on your actual, reduced payment. Just last year Fannie Mae introduced rule changes to make securing a mortgage easier for people with student debt—and several states offer grants to help qualified college graduates buy homes and pay off their loans. If these options aren’t for you, you do have the option to refinance and extend your student loan term. Your payments will be lower, which will reduce your DTI ratio, but it’s important to consult a professional to figure out whether extending your loan is in your best financial interests.

83% of Millennial renters with student loan debt said their loans are keeping them from homeownership.

I Need a 20% Down Payment

A 20% down payment is needed to avoid mortgage insurance, but it’s not always the best option for everyone’s financial situation. In fact, many experts are starting to challenge the long-standing notion that a 20% down payment is the ideal way to go about buying a home. It may sound counterintuitive, but some homeowners have found that taking on a bit more debt or temporarily paying mortgage insurance is the only way they could realistically afford a home. With home prices steadily increasing and wage levels remaining stagnant, saving up for that 20% down payment is a bit like chasing a moving target that you may not be able to catch up to. If you have the money available, go for it, but if you don’t it’s not the end of the world. There are low down payment loan options available to you that can make homeownership a reality sooner than you think.

Saving up for that 20% down payment is a bit like chasing a moving target that you may not be able to catch up to.

Are you a Millennial homeowner? What were your reservations about buying your first home? Do you have any advice to share? Share it with us on social media!

The post 3 Myths That Are Keeping Millennials from Homeownership appeared first on Cardinal Financial.