by Maurie Backman | June 17, 2021
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Credit standards loosened last month, making it easier for home buyers to qualify for a mortgage.
Qualifying for a mortgage hasn't been easy during the pandemic, as many lenders tightened their borrowing requirements in response to the economic crisis. After all, home loans can easily amount to many hundreds of thousands of dollars, and lenders want some reassurance that they'll be repaid. To that end, they can take steps like implementing higher credit score requirements that make getting approved for a mortgage more difficult.
But new data reveals that lenders are loosening up a bit. In May, mortgage credit availability increased by 1.4%, according to the Mortgage Bankers Association. That means that last month, it was a little easier to get approved for a home loan. May's credit availability level also reached its highest level since the start of the pandemic.
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The fact that lenders are easing up on borrowing requirements is positive, but that doesn't mean you're guaranteed to qualify for a home loan. To increase your chances of success, do a few key things.
First, you need to make sure your credit score is solid. Your credit score speaks to how trustworthy a borrower you are, so a higher number tells a lender you're likely to repay your home loan.
You need a minimum credit score of 620 to qualify for a conventional mortgage, but many lenders impose higher standards. It's smart to apply for a home loan with a score in the mid-600s at the least, keeping in mind that the higher your score, the lower the interest rate you're likely to snag.
You can raise your credit score by paying all of your bills on time and paying off at least a chunk of any credit card debt.
Another way to come off as a solid home loan candidate is to lower your debt-to-income ratio. That ratio tells lenders what your monthly debt obligations are relative to your income. Paying off some credit card debt can raise your credit score and lower your debt-to-income ratio. If you have other debt, like a personal loan, lowering your balance could help improve that ratio. But if you can only manage to knock out one type of debt, focus on your credit card balance -- that impacts your credit score for the better by shrinking your credit utilization ratio.
Mortgage lenders may be easing borrowing requirements, but that doesn't mean you'll automatically have an easy time getting a home loan. Raising your credit score and lowering your debt-to-income ratio are two of the most important steps you can take to buy a home in the near term and get a lender to finance it.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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