Plain and simple, if lenders were just basing your loan qualification on your credit scores, yes you could get a mortgage with a 640 for credit score. In fact, you can get a mortgage under the right circumstances with credit scores under 600. With lower credit scores however, be prepared to pay a little higher interest rate, and maybe a few extra bucks in closing costs. You may even have to come up with a little extra money for downpayment depending on where your credit scores really are, and what are the circumstances that led you there.
Out of the gate, the types of loans you’ll be looking at are FHA, Conventional, VA (if you are a vet, spouse of a vet or meet other qualifications of getting a VA loan), or USDA (loans for buying a home in a rural area).
Lending Factors with a 640 Credit Score
Now that we’ve said – if only credit scores were what counted – we’d be done with what we have to say. The catch is that – credit scores don’t tell the whole story so lenders are looking at other things such as:
- income – lenders will look at how you make your money – are you self employed or do you work for someone, how steady is your paycheck, do you get overtime, bonus money every year etc. If you are doing the income math in your head the safest bet is to think about just your base pay and then if the underwriters/lenders who look at your loan application find extra money in your income then that’s a bonus.
- expenses – one thing lenders will do is look at your debt and your income and come up with a term called your debt to income ratio. Basically this is just all of your monthly debt (including your new mortgage payment) added together divided by your total monthly income before taxes (income before taxes is called your gross income). Your debt to income ratio (also known as your DTI) needs to be at least under 45%. So if you are pushing a higher DTI then you’ll either need to reduce your monthly debt or increase your income to qualify. It is best to talk to a loan officer to get some direction in how to lower your DTI if you are close.
- debt – another factor lenders will look at when evaluating giving you a mortgage with a lower credit score is what kind of debt do you have. They will be looking to see if you have a mix of credit such as a car loan, a credit card, a student loan etc. What they don’t really want to see if 4 credit cards and nothing else. They are also going to look at whether your credit accounts are new versus old and max’ed out or managed.
- down payment sources – lenders will want to see your bank statements, retirement account statements, and other sources you plan to use for your down payment and proof of assets. Typically, lenders want to see at least 2 months of reserve mortgage payments in the bank after you put up your down payment and closing costs in a purchase mortgage. We highly recommend that before you start looking for a mortgage that you get your bank accounts in order and if you are going to get some help from someone like a parent or relative that you take care of it at least 3-6 months in advance so the money is already in your bank account. The one thing that will slow down your mortgage approval process is sudden unexplained large deposits into your bank account(s). So if you are going to get help in buying a home – make sure you talk to your loan officer first before you start moving money around.
There are more factors in getting a mortgage with a 640 credit score or lower but these are some of the major ones. Stay tuned for more mortgage information and feel free to snoop around – there is a lot of information on GetPrequalified.com – some of it is older, but general concepts and theories are still very much in play in 2014 and beyond.