How Your Credit Score Determines How Much House You Can Buy

Looking to get a large home loan? If you’re in the market for a mortgage $417,000 or larger, your credit score, along with your equity, will play an important role in your ability to get approved.

A mortgage is classified as either “conforming” or “jumbo,” and the limit for conforming loans in most U.S. counties is $417,000. However, there is a category that falls between the two. If your loan exceeds this amount even by as little as $1, your loan is automatically considered to be what’s called a “conforming high balance” or “super conforming” loan. A conforming high balance mortgage is the maximum loan limit on a per-county basis that is still backed by Fannie Mae and Freddie Mac. For example, in San Francisco County the maximum conforming loan limit is $625,500. Any amount over this (for a single-family residence) makes the loan jumbo, and is subject to further lender examination.

Here are the limits for the various loan types:

Conforming loans: $417,000 or less (most widely popular and available with less restrictive lending requirements).

Conforming high balance loans: More than $417,000, through the maximum conforming loan limit (usually set at $625,500), depending on where it’s located; underwriting is still slightly less restrictive, but requires more equity.

Jumbos loans: More than $625,500, with stronger lender examination focusing on ability to repay and income requirements.

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Note: Each county throughout the United States does have a separate conforming high balance loan limit, so if your desired loan amount exceeds $417,000 but is less than $625,500, you’ll need at least 10% equity.

Credit Scores & Loan Size

An individual with a 620 credit score, for example, is going to have a more challenging time seeking a bigger loan size, even at $417,000. It’s not impossible to get a bigger loan, but you will have to jump through more hoops because lenders use credit scores to determine the future likelihood of a borrower defaulting, in addition to considering payment history as a whole.

This is why it’s a good idea to do all you can to maximize your credit scores well ahead of applying for a mortgage. It’s also important to work with your mortgage professional on this so the steps you take to raise your credit scores are also in line with what a lender will want to see. To get an idea of where you stand, and where you’d like to be, start by pulling your credit reports (which you can get for free once a year through AnnualCreditReport.com) and checking your credit scores (which you can do for free every month through Credit.com) to identify any problem areas that you need to work on.

With that in mind, here’s a rough idea of what you’ll need to present in terms of credit score and equity/down payment for the amount of loan you hope to get. Note: If you plan on taking out a jumbo mortgage, depending on the amount sought, you’ll need at least a 680 score.

If your middle credit score is in the 620 range…Then you’ll need at least 5% equity on a loan size up to $417,000.

If your middle credit score is in the 620 range and you’re looking for a loan larger than $417,000…Then you will need at least 10% equity up to the maximum loan limit in the county in which the property is located.

If your middle credit score is 680 and you’re looking for a mortgage up to $800,000…Then you’ll need at least 25% equity in the property you’re financing.

If you want a mortgage from $800,000 through $1 million…Then you’ll need at least 30% equity along with a 680 middle credit score.

If your loan size exceeds $1 million-$2 million…Then your middle credit score should be at least 700 with 30% equity.

If your desired loan amount exceeds $2 million…Then you’ll need a 720 credit score with the same 30% equity requirement.

As good rule of thumb, for every increase by $500,000 on a jumbo-sized mortgage you’ll need 40 credit score points more as you move up the jumbo scale. The reason the credit score requirement rises in relationship to the maximum loan size is that traditionally the bigger size mortgage loans have taken larger losses in recent years and lenders, while currently to make them, only want financially strong borrowers who have a lower likelihood of payment default.

Tips on Getting a Big Mortgage

Focus on a putting in a large down payment and/or more home equity if refinancing.
Work on your credit score. Paying down credit cards to 30% or less of your total available credit can increase your score dramatically in as little as 30 days.
Pay off any and all consumer debts as much as possible as these liabilities, even though they may be small, erode your income.
If self-employed, show maximum income — no tax cheats, no shortcuts, show the full picture. Doing this may increase your tax liability (consult with a qualified tax professional first), but you’ll qualify for more house.
If you own rentals, avoid rental losses if possible, as they count as a liability against your income.