What are your chances of mortgage approval? Your down payment and credit score make a big difference

Gina Pogol
The Mortgage Reports contributor

Most mortgage applicants are not perfect

If you’re reading this article, chances are you’re at least a little worried about obtaining mortgage approval. An Urban Institute study classified mortgage applicants into three groups:

  • Applicants with a high credit score and large down payment
  • Applicants with a low credit score (below 580) and a small down payment
  • Everyone else is in the middle — a mix of credit scores and down payments

At the top, you’re nearly 100 percent certain of mortgage approval. And at the bottom, you’re just as likely to be declined. It’s the people in the middle who have the most difficulty predicting their lender’s decision — will they receive mortgage approval, or be declined?

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Crunching the numbers

Researchers used data from HUD and CoreLogic to determine what makes a “low credit profile” applicant (in other words, a risky borrower). They refer to these files, which are unlikely to get mortgage approval, as “LCP.” Three factors contribute to your desirability as a borrower:

  • Loan-to-value
  • FICO score
  • Debt-to-income ratio, which is a comparison between income and expenses

The following charts show your likelihood of being counted among the risky if your debt-to-income ratio is “average,” which is 39 percent, according to mortgage data tracking firm Ellie Mae.

How down payment affects your chances

You’d think that with over 30 percent down payment or home equity, lenders would okay just about anyone. And if your score if 740 or higher, your chances of denial are about zero. But lenders often decline applicants with low FICO scores.

In fact, Fannie Mae and Freddie Mac, which back most mortgages in the US, won’t buy home loans with credit scores under 620. Regardless of the size of your down payment. You’ll have to look to FHA, VA or “non-prime” lenders if you have a low credit score.

Percentage of low-credit mortgage applicants denied even with a 32 percent down payment

This next chart shows how lenders are likely to view your application if your spending is average, but your down payment ranges between 5 and 10 percent. In other words, your loan-to-value is between 90 and 95 percent.

Percentage of low-credit mortgage applicants denied with a 5-10 percent down payment

The smaller your down payment, all other factors being equal, the lower your chances of mortgage approval. Now, let’s take a look at how different programs analyze your risk profile, and how good your chances are with them.

Mortgage approval chances: Fannie Mae and Freddie Mac

Freddie Mac and Fannie Mae loans (also called “conforming” mortgages) allow FICO scores as low as 620. They also approve mortgages with loan-to-value (LTV) ratios as high as 95 or 97 percent. In addition, the two corporations will buy mortgages with maximum debt-to-income ratios of 45 percent under their standard guidelines.

However, this does not mean that you can get approved with a low down payment and a high DTI and a poor credit score. For example:

  • You are eligible with a 620 FICO if you put at least 25 percent down and get a fixed-rate mortgage and your DTI is 36 percent or lower
  • With less than 25 percent down, you’ll need a 680 FICO and a maximum DTI of 36 percent
  • If your DTI exceeds 36 percent, you’ll need a 640 FICO with 25 percent down or a 700 FICO with less than 25 percent down

The illustration below shows the scores of approved conforming financing in December 2018 according to mortgage data firm Ellie Mae. Yes, there are approvals with FICOs below 620, but the data includes special programs like HARP refinancing that do not consider credit scoring.

Most approved loans under these programs had FICO scores over 700.

Percentage of closed conventional loans by credit tier

Mortgage approval with FHA

FHA’s guidelines are much less restrictive. They allow loan approval with a FICO score as low as 580 and just 3.5 percent down, and a score down to 500 with 10 percent down.

However, there is a difference between allowing a low credit score and actual bad credit. If your score is low because you have little credit history, too many accounts, or bad history that’s at least a year old, FHA may give you a shot. But if you’re missing payments all the time or have a ton of collections, you’re too risky. You have to prove that you can manage debt, and that means paying your bills on time for at least 12 months.

Here is the breakdown of FICO scores for approved FHA borrowers from Ellie Mae:

Percentage of closed FHA loans by credit tier

You can see that the program is much more forgiving, with the majority of approvals going to applicants with FICO scores of 600 or better.

It’s a balancing act

Understand that there is a close relationship between loan approval and your FICO, DTI and LTV — your credit score, debt-to-income ratio and your down payment. If you are weak in one area, you’ll need to make it up somewhere.

How to up your chances of mortgage approval

If your debts are too high or your credit score too low, maybe buying a home is not the best move right now. But it could be in a year. Or even six months. You need to start “practicing” for homeownership now, and this will put you in a better position to buy.

Using our Home Affordability Calculator, determine how much house you want to buy and what payment you’ll have to make each month.

  • Subtract the difference between that new payment and what you currently pay for housing now
  • Take that difference, use it to pay your debts down to a manageable amount
  • Once your debt is under control, put that amount into your savings to boost your down payment

This accomplishes several things. It teaches you what you’ll have to live on once you buy your house, so your spending stays under control. It helps increase your credit score. And it makes you less likely to fall into that dreaded Low Credit Profile category — the one lenders shy away from.

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