Buying a house is the most expensive purchase that you’ll ever make. That’s especially true now that the housing market has increased and new pricing records are being set each month.
In February of 2022, the national median listing price reached a new all-time high of $392,000. There’s no telling when the prices will stabilize.
The coronavirus pandemic was the primary reason for these unprecedented increases. There were significantly fewer houses being built during the pandemic, and supply chain issues created huge markups on building materials. This combination of factors directly contributed to skyrocketing prices.
Prior to the pandemic, there were roughly 656,000 homes listed that were considered affordable for households making between $75,000 and $100,000 annually. Today, there are currently less than 250,000 of these homes listed.
Pre-pandemic saw one available listing for every 24 households in that income bracket. There are now 65 households for every listing in that same bracket.
The scarcity of these affordable homes had led to a particularly fierce and highly competitive market. Unless you’ve taken advantage of unique savings opportunities, then you probably don’t have enough money to buy a house in cash. This means that you’ll need to get a mortgage loan.
What Factors Play a Role in Mortgage Loan Agreements?
- Credit Score
- Debt-to-income ratio
- Down payment
Entering into a mortgage loan agreement is a very serious financial decision. These agreements typically last for decades and come with a lot of responsibilities.
As such, financial lenders require a thorough review of the financial information of anyone requesting a mortgage loan. Mortgage lenders view these loans as a long-term financial investment, and they typically prefer to take on as little risk as possible.
There are a lot of factors that play a role in mortgage loan agreements. Every lender has different qualifications, and every borrower has unique circumstances. Here are the three most common factors that influence the terms of a mortgage loan:
Credit Score
Easily the single most important factor will be your credit score. This three-digit number ranges from 300 to 850 and is based on your previous borrowing behavior. Credit scores function as a risk assessment scale where risky borrowers have a lower score, and dependable borrowers have a higher one.
A credit score is so important that all of the details can’t be covered in this section alone. However, here is a general idea of how a credit score within a certain range is viewed by mortgage lenders:
- Poor 300-579
- Fair 580-669
- Good 670-739
- Very Good 740-799
- Excellent 800-850
Debt-To-Income Ratio
The debt-to-income ratio (DTI) is another very crucial aspect of a mortgage loan. This ratio is calculated based on your overall debt in relation to your monthly income. A lender will take the sum of your monthly debt payments and divide it by your total monthly income.
For example, let’s say that you have monthly payments of $1,200 for housing, $450 for a car loan, and $350 for student loans. Your total monthly debt would be $2,000. Let’s also say that you have a job that pays $4,000 a month and a side hustle that pays another $1,500.
Your total monthly income would be $5,000. A lender would divide $2,000 by $5,500 and calculate that your DTI ratio is currently 36%.
Every mortgage lender has its own preferences for DTI ratios. There are some that are very strict and others that are a little more lenient.
However, it’s virtually impossible to find a lender that’s willing to grant a mortgage to someone with a DTI over 43%. The idea is that a lower DTI ratio will make it easier for you to maintain your monthly mortgage payments.
Down Payment
Putting a down payment on a home is good for both you and the lender. You’ll immediately have equity in the home, and the lender will have an opportunity to get its money back if you default. It’s possible that making a big enough down payment can help to offset a bad credit score since there will be a smaller risk for the lender.
Ideally, you should try to make a down payment of at least 20% and borrow the remaining 80%. It’s possible to get certain mortgages that only require a 3.5% down payment. The problem is a down payment of less than 20% will typically require you to get private mortgage insurance (PMI).
The total cost of PMI is usually between 0.5% and 1% of the total loaned amount. You’ll continue to pay PMI costs until you owe less than 80% of what the home is worth.
What Credit Score Do I Need for a Mortgage Loan?
As mentioned earlier, a credit score is the single most important factor for a mortgage loan. The other factors play very important roles too, but your credit score is the first thing that a lender will review. If your score is too low, then they’ll reject your proposal before looking into any of the other details.
There is no firmly established minimum credit score that will guarantee a mortgage. Every lender will have its own preferences based on the overall risk versus the potential reward. Another important factor will be the type of mortgage that you’re attempting to receive. Not all mortgages are the same, and they can often come with very different requirements.
These are the four of the most common types of mortgages and their typical credit score requirements:
Conventional Loan
A conventional loan refers to mortgages that you’d get from banks, credit unions, and traditional mortgage lenders. The majority of conventional mortgages come with fixed interest rates that will vary based on your credit score and the term of the loan.
The most common term length for a mortgage is 30 years, but most lenders offer a wide variety of term options.
Since these loans aren’t backed by the federal government, you’re going to need a good credit score to be considered. You’ll typically need a credit score of at least 640 to secure a conventional.
If you make a big enough down payment, it’s possible that you might be able to get a mortgage with a 620 score.
Federal Housing Administration (FHA) Loan
The Federal Housing Administration offers mortgage loans to citizens with a more modest income and a lower credit score. Unlike conventional mortgages, these loans are backed by the federal government. That allows the conditions of these mortgages to be much more flexible.
It’s possible for you to be granted an FHA loan with a down payment as small as 3.5% and a credit score of 580. A 10% down payment will be required if you have a credit score between 500 and 580. Just like conventional loans, you’ll need to make PMI payments until you have at least 20% in home equity.
Veterans Affairs (VA) Loan
The Department of Veterans Affairs offers mortgage loans to qualifying veterans and active military service personnel. These specialized mortgages are also backed by the federal government, which enables them to create highly favorable conditions for borrowers.
One of the best things about a VA mortgage is that there’s no requirement for a down payment or mortgage insurance. However, there will be an upfront “funding fee” that will vary based on your down payment.
Here is an example of the funding fee chart for 2022:
- A down payment between 0% and 4.9% will result in a fee of 2.3% to 3.6%.
- A down payment between 5% and 9.9% will result in a fee of 1.65%.
- A down payment of 10% or more will result in a fee of 1.4%.
There’s no set credit minimum for a VA loan, but they typically prefer a score of at least 620. It’s possible that a large enough down payment can help you get a loan with a score as low as 580.
United States Department of Agriculture (USDA) Loan
The United States Department of Agriculture has one of the least known mortgage assistance programs. These mortgages are designed to help eligible homebuyers purchase property in rural areas. The program is known as the USDA Rural Development Guaranteed Housing Loan Program and is funded by the federal government.
The goal of the program is to help improve the economy and quality of life in rural America. The most important requirement for these loans is that the home must be in an area that’s officially classified as rural.
These mortgages will typically come with a low-interest rate and won’t require a down payment. However, you will be required to purchase mortgage insurance if the down payment is less than 20%.
Ideally, you should have a credit score of at least 640 before applying for a USDA loan. It’s possible that a large down payment can loosen the requirement, but it’s not guaranteed.
How Is Your Credit Score Calculated?
Credit scores are calculated based on a relatively simple math formula. Once you understand what makes up your credit, it will be easier to improve your score. A higher credit score will not just help you get approved for a loan but will help lower the interest rate as well.
Here is a breakdown of what makes up your credit score:
- Payment History (35%): Making payments on time is the single most important factor in your credit score. Missing a single payment by a few days can be enough to drop your credit score by several points. The longer that you are behind, the more significant of a drop you’ll encounter.
- Amount Owed (30%): The key here is to maintain a low credit utilization ratio which is the sum of your credit balances divided by your limits. Ideally, you should keep this ratio under 30%. So if you have three credit cards that combine for a total limit of $10,000, then you shouldn’t use more than $3,000.
- Credit History (15%): The length of credit history that you have, the more beneficial it will be to your score. This category looks into the ages of your newest and oldest accounts, views their most recent activity, and establishes an average age for all of your open accounts.
- New Credit (10%): The primary purpose of this category is to show how recently and how often you’ve been applying for new lines of credit. Hard pulls can have a negative impact on your score, so you should be careful when you apply for loans and credit cards. Too many credit inquiries can scare off lenders and lower your score.
- Credit Mix (10%): The more diverse your credit portfolio is, the better your score will look. Being able to manage credit cards, car loans, personal loans, and a mortgage can show that you’re capable of effectively juggling debt.
How Can Yotta Help?
Having a high credit score is the most important factor in getting a mortgage. You should take the necessary actions to increase your score as much as you can before applying for a loan.
In the meantime, you should be focusing on how to get enough money to make a down payment. There are some mortgages that won’t require a down payment, but the vast majority of them will. Using Yotta is one way to help you save up enough money to cover a down payment.
Yotta is an account that functions in a similar way to a traditional banks and credit union. You can deposit and withdraw money as you please. The key difference comes in the form of interest. Instead of a microscopic interest rate that you get at most banks, Yotta will pay you interest in the form of weekly prizes. Yotta does not hold any customer funds. Deposits are held with Evolve Bank & Trust, member FDIC. Funds held with Evolve Bank & Trust, member FDIC are eligible for FDIC insurance up to $250,000.
The way it works is actually pretty simple. At the beginning of the week, you’ll be given one ticket for every $25 that you have in your account. Another number will be drawn each night at 9 PM EST.
You’ll be able to win prizes based on how many numbers match the numbers on your ticket. Match six numbers without the Yotta Ball, and you’ll win a new Tesla Model 3. Match six numbers with the Yotta Ball, and you’ll win a $10 million cash prize.
The Takeaway
Getting a mortgage in the current housing market can be a difficult task. There are several mortgage options that offer flexible conditions, but they also come with strict requirements.
Regardless of the mortgage loan that you select, you’re going to need a good credit score and enough money to cover a down payment.
Yotta might not be able to help your credit score, but it can definitely help you with the down payment. The more money in your Yotta account, the more tickets you’ll receive, and the greater of a chance that you’ll win the big jackpot. It’s possible that you can win enough to buy your dream home in cash.
Visit Yotta today to create an account and get started. The sooner that you start saving, the sooner that you can enter the weekly drawings.
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