• Credit Score of 635 and A Lot of Credit Card Debt - Any Chance for a Home Loan?

    Brandon Cornett

    By Brandon Cornett
    © 2011 All rights reserved

    Reader question: "I just checked my FICO score and found that it was 635 (the middle number at least). Where does this put me, in terms of buying a home? Do you think I can get a home loan with a 635 credit score these days? I should also add that I have quite a bit of credit card debt at the moment. I'm not sure if that's a factor or not."

    Yes, your credit card debt will play a major role during the mortgage process. So will your credit score. So let's talk about each one in turn, starting with your FICO number.

    Disclaimer: Only a mortgage lender can tell you if you meet their guidelines for approval. I am happy to share my own observations with you, and they are based on plenty of research. But you shouldn't take it as gospel. Getting pre-approved for a home loan is the best way to find out where you stand.

    A Credit Score of 635 Puts You on the "Fence"

    A FICO credit score of 635 will put you right on line between home-loan approval and rejection. That's because many mortgage lenders today require a credit score of 640 or higher. You said your middle number was 635, which means you're in the ballpark. So whether or not you can get approved will depend on...

    • How strict the lender is with their minimum credit-score requirements
    • How well you measure up in other areas, such as debt ratios
    • How much of a down payment you have

    There's another significant number you should know about, and that's 620. This is the minimum credit score established by Fannie Mae. This means that any lender that wants to sell their home loans to Fannie (through the secondary mortgage market) has to use their minimum guidelines.

    With a 635 FICO score, you're obviously above this cutoff point. That much is good news. But as I mentioned earlier, some lenders will impose their own stricter guidelines on top of Fannie Mae's requirements. These are known as overlays. So while Fannie Mae might only require a 620 credit score, the lender might set the bar at 640 or above. Like I said, you're right on the line with a FICO 635.

    Just keep in mind that a lender will consider other factors, beyond your credit score. That number is important, but there are others to consider as well. For example, the amount of debt you are carrying (relative to your income) will affect your chances of getting approved. Most lenders prefer your monthly debts to be no more than 40% of your monthly income. Some will allow more than this, while others allow less. It depends on the mortgage company you're dealing with.

    Having a credit score of 635 will help you get your foot in the door, so to speak. You can probably get approved for a loan with a FICO score in that range. But you certainly won't qualify for the best interest rates on the loan. In order to do that, you'd need to push your score into the 750-and-up range. The higher the better.

    How Your Credit Card Debt Affects You

    That answers your first question. Now let's talk about the amount of credit card debt you have. Yes, this can certainly affect you when applying for a home loan. Actually, the level of debt you have can affect you in two ways:

    • Debt-to-Income Ratio -- When you apply for a mortgage loan, the lender will want to know how much debt you have in relation to your income. This is aptly referred to as your debt-to-income ratio, or DTI for short. If you are spending too much of your income on your combined debts (including credit cards), you might get rejected by the lender. Learn more here
    • Credit-Utilization Ratio -- This ratio affects your credit score. It's a comparison between the amount of money you owe on your credit cards and the available limit for those cards. For example, if your credit limit is $10,000 and your balance is $5,000, your utilization ratio is 50 percent. You are utilizing 50 percent of your available limit. A higher ratio can have a negative effect on your FICO credit score. Learn more here

    So a high level of credit card debt can hurt you in two ways, when applying for a home loan. It can increase your DTI ratio, which makes it harder to get approved for a loan. It also increases your utilization ratio, which can harm your FICO score. By reducing your card balances, you could actually improve your 635 credit score (and possibly within a short period of time).

    Getting Pre-Approved by a Lender

    If you're ready to buy a house right now, then you might want to schedule an appointment with a lender to get pre-approved for a loan. They will review your FICO score along with other factors (such as your income, employment, debt, etc.). After this process, they'll be able to give you a number they are willing to lend you.

    If you're not going to enter the market for some time, you should focus on improving your credit as much as possible. If you can push your score above 635, you'll have an easier time getting approved. If you can raise it by 50 points or more, you'll also qualify for a lower interest rate -- and this can save you a lot of money over the long haul.Let's start with the short answer.