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1 Thing You Need to Know About 3% Down Mortgages

By Nathan Hamilton - Apr 5, 2017 at 9:43PM

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3% down-payment mortgages have become popular options for new homebuyers, mostly because these loans make homeownership accessible for Americans by cutting up-front costs. Many people have a hard enough time saving a few thousand dollars for an emergency fund, let alone a 20% down payment, so the popularity of 3% down-payment mortgages isn't surprising. But there are a number of factors homebuyers should consider when choosing the right mortgage type.

In the video segment below, The Motley Fool analysts Kristine Harjes and Nathan Hamilton talk about one such factor and how your credit score plays into your chances of approval for a low mortgage rate.

Kristine Harjes: We know that many people out there are considering 3% down mortgages. They sound awfully enticing when you compare them, at least upfront.

Nathan Hamilton: Very popular.

Harjes: To a 20% mortgage where clearly there's a lot of money to be pocketed before you can actually afford a 20% mortgage.

Hamilton: Yep.

Harjes: But we wanted to make sure that you had all of the information possible about 3% down mortgages particularly because sometimes your bank won't tell you everything.

Hamilton: Yeah if you look at it, so first off one of the important things is where can you get these? I know Wells Fargo is an option. Bank of America is an option as well but what is published on paper isn't necessarily the truth of what actually happens in the end. These loans, they are pretty advantageous in that they are a good option for many people but they'll say on paper OK you need a fico score of 620 that's the minimum underwriting criteria for you to qualify. Now if you look at what the average credit score is for Americans, it's just under 700, which is far higher and so you look at it and say, OK the actual approval for many of these 3% down mortgages through banks at least, credit scores are actually closer to about 750. So you need to take that into account if you are considering a 3% down mortgage with say Bank of America, Wells Fargo. Any of the banking lenders that may offer these. Is your credit score in shape? Is it high enough to even qualify for?

Harjes: But fortunately even if it is below that 750 or even if it's below the 620 that is the stated requirement, there are ways that you can improve your credit score and even some ways that you can do it pretty quickly.

Hamilton: Yeah if you've got a credit card debt, the best thing to do is reduce your credit card debt immediately. Essentially pay it off before the statement date, because what that does is it improves what's called your credit utilization ratio and if you do that, you're essentially reducing the debt available versus how much you have available to borrow and that impacts about 30% of your fico score and tends to impact your credit score pretty immediately.

Harjes: I'll add to that tip that you can also impact that same number by increasing your credit card limit.

Hamilton: Sure.

Harjes: because then all of a sudden that meaningfully will change your credit utilization ratio if you're authorized to use more credit and you're still using the same amount, that changes that number in your favor.

Hamilton: Yep and it can be as soon as one month, two months down the road before you start to see your credit score increase but whether that goes from 620 to 750, that's a different story but there are positive trends.

Harjes: Hey, every little bit counts.

Hamilton: It does.

Harjes: For sure. Folks listening, if you would like some more credit score tips check out fool.com/mortgages where you can get a guide called "5 Tips to Increase Your Credit Score Over 800," as well as a ton of helpful mortgage tools including access to highly rated lenders with low rates.

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