Because of the recent global recession that greatly affected the economy, the real estate market around the world experienced a sharp decline. Among the factors that contributed the most to the recession are the United States housing market correction and the subprime mortgage crisis.
These factors were brought about by the rising valuations of real estate properties in the United States until it had reached levels that could no longer be afforded by borrowers. It is for these reasons that huge changes have been implemented by mortgage companies in accepting mortgage applications particularly in the required minimum credit score for a mortgage.
When applying for a mortgage, the lender will review your FICO credit score to determine if you are eligible to receive the loan. The FICO credit score is critical in determining your eligibility because it is the lender’s way of knowing if you are capable of paying the loan. The FICO credit score will also determine the value of the loan and the interest rate you are eligible to have for that loan. However, the credit score isn’t the only thing a lender will review before approving your mortgage application. They will also review your debt-to-income ratio, the size of the loan compared to your income, as well as other financial factors.
Due to the volatile condition of the current real estate market, the minimum credit score for a mortgage is bound to keep changing indefinitely until the economy stabilizes. Therefore, there is no definite answer to that question. However, careful analysis of the minimum credit scores for the past few months will give us a clear observation of the changing trends in the real estate and mortgage industries.
For example, last August 2008, the minimum credit score needed for a mortgage was 680, which later changed to 700 on October of that year. By January of 2009, the minimum became 660. Early this year, the minimum averaged at 620. It is surprising to note that three years earlier, a credit score of 620 would have given the borrower the best interest rates, which means the minimum credit score for a mortgage of that year was much lower.
It should be safe to say that with a credit score of about 620, looking for mortgage loans should not be too difficult. As of this writing, the credit score needed for a mortgage should be somewhere near that number. However, having a credit score much lower than that might prove troublesome for a borrower.
With this in mind, it is best to start improving your credit score as early as now. You should start by asking for a copy of your credit report from any credit bureau and a copy of your credit score from FICO if possible.
Knowing your current credit score and credit rating can help you evaluate how fast you can improve your credit score to an acceptable value. The only way to improve your score is by religiously paying off debts to prove that you are capable of paying off larger loans. This will benefit you immensely when applying for a loan because it will give you a higher chance of reaching the minimum credit score for a mortgage. Furthermore, it allows you to apply for loans with more attractive interest rates.