A credit score or rating may seem like a confusing topic to some people, particularly if you don’t have financial savvy. Nonetheless, it is common knowledge that a good credit score can significantly increase your chances of qualifying for credit, such as mortgages and credit card services.
However, before you can get this credit, you’ll have to satisfy the minimum requirements. These necessities include having a good credit score. Nowadays, most mortgage lenders use a standard credit scoring system known as the FICO® score.
Although this scoring system plays a critical role during the mortgage application process, financial institutions use several determinant factors that assess whether you deserve the loan. Such factors include the level of income, assets, debts, and the property’s valuation, all of which will determine if you can get the mortgage approved.
We will look at the various credit scores you’ll need before applying for a mortgage loan and how lenders review your credit rating. We will also dig into whether you can procure a mortgage with bad credit and how you can turn your bad credit score into a good one.
How Lenders Review Your Credit Rating?
Credit scores are a numerical system that provides insight into your credit profile. Different financial institutions use varying crediting rating systems to determine the creditworthiness of a borrower. The two most common credit-scoring systems are the FICO® score and the Vantage Score. Most home lending institutions will use the FICO model.
Excellent credit history and scores help to portray that you as an individual deserve credit and can repay the mortgage. When you have a poor credit rating, lenders may set more stringent mortgage requirements for you or deny you credit altogether.
Minimum Credit Score You Will Need For a Mortgage Loan
Credit rating requirements differ with time, and currently, this condition varies depending on the mortgage type you are looking to get. Here is a detailed overview of these various mortgage types and their required minimum FICO® Scores.
Understanding the credit score requirements will help when you are going to get your mortgage approved.
1. CONVENTIONAL MORTGAGES
Conventional mortgages are credit loans you can use when buying homes, and they follow the Fannie Mae and Freddie Mac standards. These governmental agencies insure such mortgages. If you are looking to secure such a loan, you’ll need a FICO® Score of approximately 740 or higher to get the best rates. When you meet this requirement, you’ll be in a position for a conventional mortgage loan with the best terms.
Potential homeowners who want to access conventional loans need to have better than average credit. Some lending institutions will grant a loan with a score as low as 620, but you won’t get the most favorable rates and terms.
2. FHA LOANS
FHA loans refer to mortgages insured under the Federal Housing Administration, meaning they are less volatile and risky. It is often easier to get an FHA loan than a conventional loan. This mortgage option allows the loan applicant to pay a low down payment of 3.5%.
You’ll also receive access to equity refinances, and you can refinance approximately 97.75% of the residence’s property value.
FHA mortgages allow potential homebuyers with lower credit scores to secure a home. One significant advantage of the FHA loan is that you readjust your monthly repayment rates after discussing your financial situation with your bank or other financial institution.
FHA mortgages need you to have a minimum credit rating of 580 and above before you can apply for the loan. The down payment charge is a measly 3.5%, and you don’t need an official FICO® score to get the loan.
3. VA LOANS
VA loans refer to mortgages insured and offered by the U.S. Department of Veteran Affairs. These mortgages are popular because they don’t require any down payments, and potential borrowers with low credit ratings can easily access them.
Before you know the credit score needed to buy a house using VA loans, it would be best to know about the eligibility requirements. These requirements include spouse relation to deceased military personnel during active duty or being a veteran in the U.S. Military.
What Credit Score Do You Need When Buying a Home?
Most financial institutions and lenders set a baseline credit rating that serves as a qualifying standard when applicants apply for a mortgage. As long as you have a credit rating of above 700, you can effortlessly acquire a low-interest mortgage that you can pay back slowly.
However, if your current credit scores are in the 600s range, some financial institutions can consider you a financial risk and limit your mortgage options. For instance, if your credit rating is at 680, credit lenders might still consider you creditworthy, and you can get a mortgage.
Most lenders prefer to use a credit rating of 620-640 as the minimum credit score for procuring a quality mortgage. One of the best ways to quickly bump up your credit scores is to use a financial service such as Credit Karma.
Credit Karma gives you the knowledge to make the right credit decisions – the ones that will help improve your credit score.
Can You Purchase a Home With Bad Credit?
From a financial standpoint, you can procure a home even if you have bad credit. If your credit rating is within the 500s range, you can still qualify for a subprime mortgage loan. Such loans come with additional fees and higher interest rates.
Additionally, subprime loans require you to pay a 20% down payment if you don’t have the credit score needed to buy a house. If you lack the down payment for the mortgage, you’ll have to take up private mortgage insurance that often has pricy premiums.
Credit scores can fluctuate depending on your current financial situation. You can improve a bad credit rating by working on your creditworthiness, and your score will slowly increase. Start by looking at your bad financial habits and see where you can cut back.
Also, look at how you can reduce your debt load and clarify any credit report errors that may be lowering your creditworthiness. Nowadays, you can get a free credit score rating and tips on improving your financial situation to ensure you have a good credit score. Credit Karma, as mentioned, can really help with that.
If you have a terrible credit rating, it would be best to improve your credit so that you can become eligible for low-interest rate mortgages.
When procuring a mortgage loan, it would be best to gather all relevant financial documents and consider finding a loan co-signer. It would also help if you clearly understood where your credit score stands at the moment and identify efficient techniques to increase it. Hopefully, you have found the tips on the credit score needed to buy a home to be useful.