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Mortgage lenders are getting stricter, but you still don't need a perfect 850 credit score

It's harder to get a mortgage right now, but you still don't need a perfect credit score. CNBC Select reveals what credit score you realistically should have to get approved for a loan.

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Just 1.6% of the U.S. population with a credit score has a perfect 850, but some experts say you only really need a 760 to qualify for the best rates on credit cards, auto loans and mortgages. However, one representative from the mortgage lending field argues that you can still get a mortgage with a fair or average score as long as you're gainfully employed.

Since Congress passed the $2 trillion coronavirus stimulus package, 4 million Americans (and counting) have requested mortgage forbearance in response to the economic fallout. But despite the concerns, the real estate market is still hot, according to Movement Mortgage loan officer Heidi Gage.

"We're still closing lots of loans," Gage tells CNBC Select. While all the economic uncertainty makes it harder to qualify for credit products, lenders are much more concerned about your income than your credit score given that so many people are now unemployed

Below, CNBC Select reveiws what credit score you need to get approved for a mortgage during the coronavirus pandemic, looks at how furloughs and layoffs hurt your chances of getting a mortgage and shares tips on how to improve your score while you wait for the right time to buy a home.

Your income may be more important than your credit score

In the wake of the coronavirus pandemic, lending has dramatically changed over the past few months. Credit card companies have started to cut customers' credit limits to lower the risk of defaulted payments. Meanwhile, on the home lending side, investors are pulling back on jumbo loans (for mortgages over $510,400 and $765,600 in high-cost areas) and non-qualified mortgages for borrowers with variable income (like self-employment, lump-sum incomes, fluctuating incomes, etc.)

But for more conventional borrowers who still have a consistent source of income, Gage says there are viable options.

"Many lenders are still lending to borrowers with 620 scores," says Gage, as long as the borrower has proof of sufficient income. A 620 score falls in the fair/average range according to both the FICO and VantageScore scoring models.

Keep in mind: A good or excellent credit score will qualify you for better interest rates and terms, but mortgage lenders can work with a lower score as long as your income checks out, Gage says. It also helps if you have a down payment of at least 20%.

However, showing proof of stable income has become even more essential.

"The biggest challenge we've encountered on the lending side is layoffs and furloughs," Gage says.

Throughout the mortgage application process, your employment must be re-verified several times. If you're laid off at the same time you're applying for a mortgage, you may have to wait and apply again, no matter how good your credit score is.

"In many cases, we've seen buyers and sellers have to exit the market due to a layoff," says Gage.

How mortgage lenders pull your credit score

There are three main credit bureaus — Experian, Equifax and TransUnion. When applying for a mortgage, lenders usually pull all three of your credit reports and scores using each bureau's scoring model (FICO, Equifax and VantageScore, respectively). Gage reports that her lending company uses the middle of your three credit scores for borrower applications. Other mortgage lenders may have their own proprietary scoring system. 

If you're on furlough, or you've been recently laid off, it may feel like there's not much you can do to improve your chances of getting a mortgage. But there are some active steps you can take to improve your credit score while you look for a new job.

How to improve your credit score

If you've got your sights set on getting a mortgage within the next year, there are a few things you can do to turn your fair credit score into a good one. You'll get the best interest rates and terms if your credit score is 760 or higher, according to some experts (though Gage could not confirm this).

The most important thing you can do to keep your credit score high is to pay your bills on time and keep a low ratio of debt compared to available credit (this is known as your credit utilization rate). While you're saving money for a down payment, consider also setting aside extra cash to allocate toward paying off your credit cards in full at least 30 to 60 days before you apply for your loan. Bringing your credit utilization rate down to less than 10% is one of the fastest ways to make your score go higher in a short period of time.

Refrain from closing any old accounts until your mortgage is approved, as that can impact your score as well. And in the year leading up to your mortgage application, try to limit new credit inquiries so that you don't have too many hard pulls on your report

The best credit cards for fair and average credit

While you wait for economic circumstances to improve, you could use a new credit card to help raise your score.

While the best travel cards and rewards credit cards come with strict credit requirements, there are some cards made for people with average, or even poor, credit scores. These can be a good option when your goal is to improve your credit score, but only if you feel comfortable taking on a new line of credit.

A new credit card will add to your total available credit and improve your credit utilization rate. But if you worry that you could easily max it out and fall into deeper debt, then you can hold off on this option until you're ready. (Read the four things you should do before you open a new credit card.)

Here are some of CNBC Select's picks for top credit cards for fair and average credit:

See our full comparison here.

Note: While the above cards are generally marketed toward applicants with fair or average credit, there is no guarantee you'll be approved. We recommend checking your approval odds before you submit a full application (which results in a hard inquiry on your report). 

Bottom line

"Covid-19 didn't necessarily make it more difficult to approve a loan, however, it did increase the amount of paperwork," says Gage.

You'll likely need to re-verify your employment several times when you're applying for a mortgage during coronavirus.

But while employment is non-negotiable right now, you can still probably get a mortgage with a fair or average credit score. To qualify for the best mortgage interest rates, however, you'll want to work on improving your credit score as much as you can and save for a sizable down payment.

Don't miss: What credit score is required to buy a house?

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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