When buying a house with a mortgage, you must meet several requirements to increase your approval odds. Those requirements include proof of income, a down payment, an acceptable debt-to-income ratio, and your credit score.
Your credit score gives lenders an idea of how likely you will make your mortgage payments on time. While a good credit score is ideal, mortgage options are available if you have below-average credit. Learn about the credit score needed to buy a house in Arizona and how to improve your credit if you don’t currently meet the requirements.
Credit Score Needed To Buy A House In Arizona (By Mortgage Type)
When you buy a home, you can choose from several different mortgage types. Each option has different minimum credit score requirements.
Keep in mind that while the below credit score requirements apply to these different mortgage types, individual lenders may have their own minimum credit score requirements that may be higher than what is generally required.
Conventional loan requirements
Conventional loans are offered by lenders without the backing of a government program. Most conventional loans require borrowers to have a down payment, and they’re the most common type of mortgage loan. Most conventional loans require a credit score of at least 620, though some lenders may require credit scores of 660 and higher. Borrowers with lower credit scores may have to pay higher interest rates to compensate for the increased risk a lender assumes by funding that borrower.
FHA loan requirements
FHA loans are insured by the Federal Housing Administration and offer looser requirements than conventional loans. An FHA loan allows borrowers with a credit score of 580 or higher to make a down payment as small as 3.5%. Borrowers with a credit rating of 500 to 579 must make a down payment of 10%.
This loan is a good option for homebuyers whose credit score isn’t high enough to qualify for a conventional loan or for buyers who don’t have the savings to put down a traditional 20% down payment.
VA loan requirements
VA loans are guaranteed by the Veterans Administration and are designed for military service members, veterans, and their surviving spouses. VA loans don’t require buyers to put down any down payment. While there is no minimum credit requirement for a VA loan, lenders determine their own credit minimums, often 620 or higher.
USDA loan requirements
USDA loans are insured by the U.S. Department of Agriculture and are intended for homebuyers planning to buy a house in a rural location. The loans don’t have a set minimum credit score, so lenders can determine their own credit requirements. Often, lenders require credit scores of at least 580.
How To Increase Your Credit Score To Buy A House In Arizona
If your credit score isn’t ideal, these tips can help you to improve it. Keep in mind that improving your credit score takes time, so it’s best to put these tips to use as early as possible.
- Make your payments on time: Focus on making all of your payments on time. Consider setting up automatic payments, so you don’t miss any payment deadlines.
- Work to pay down your debt: Besides making your minimum monthly payments, work on paying down your debt. Paying down some of your loan or credit card balances will improve your credit utilization rate or how much debt you have compared to your total available credit. Keeping that utilization rate low can boost your credit score.
- Don’t close your credit cards: Your credit cards impact your credit utilization rate since they contribute to the total amount of credit you have available. Closing a credit card can also affect the length of your credit history. Even if you’re not using a credit card, keeping it open can help to maintain your credit score.
- Avoid applying for new credit: When you apply for new credit, whether that’s a credit card or a loan, the lender will perform a hard credit inquiry, which will slightly lower your credit score. Avoid applying for new credit and making large purchases, especially if you plan to buy a house soon.
Other Factors To Consider When Purchasing Property In Arizona
While lenders consider your credit score, they also look at other factors when determining whether to approve you for a mortgage. Improving your credit can help you get approved, but you should also focus on these other factors.
1. Debt-to-income ratio
Lenders consider your debt-to-income ratio (DTI), the percentage of your gross monthly income you use to pay your monthly debts, like your mortgage, car loan, and credit card payments. Lenders tend to prefer debt-to-income ratios lower than 36%, though some lenders may provide mortgages to borrowers with a ratio as high as 43%. The lower your debt-to-income ratio, the better, and the greater the chances you will be approved for a mortgage.
Focus on paying down debts like a car loan to improve your debt-to-income ratio. Try to purchase items with cash instead of using a credit card and increase your income with a second job to improve your debt-to-income ratio.
2. Loan-to-value ratio
Loan-to-value ratio (LTV) plays a role in the mortgage approval process. This ratio includes the amount of your loan compared to the home’s value.
For example, if you bought a $200,000 home and put no money down, the ratio would be 100%. If you purchased a $200,000 house and put $100,000 down, the ratio would be 50%.
Lenders prefer a lower LTV, because it reduces the risk that you will default on your mortgage. While there is no universal loan-to-value ratio requirement for a mortgage, most lenders will want to see a ratio of 80% or below.
3. Employment history and current assets
Lenders may also review your employment history and current assets. Lenders want to see that you have been steadily employed, which indicates that you are likely to be able to make your mortgage payments. Your current assets also suggest that, even if you were to lose a job suddenly, you would likely be able to continue making your mortgage payments.
Finance Your Next Home With Arizona Central Credit Union
While your credit score plays a crucial role in being approved for a mortgage, other factors are also important. Focusing on building your credit and reducing your DTI can help you to prepare to buy a home.
As you prepare to start looking for a home, consider getting prequalified for a mortgage to get a better sense of the amount of money you can borrow. Our mortgage options page can help you to explore the different mortgages available. If you have additional questions or need more information, contact a mortgage specialist.
