What is the lowest credit score needed for a home loan?

Even if you might say that you’re already pretty satisfied with the home you are renting right now, nothing beats having your own house. Sure, you’ll still have to deal with the same leaks or plumbing issues, but at least there’ll be lesser hurdles when it comes to home improvement.

However, there’s a good reason why not everyone can get to buy a house, aside from personal preference. Real estate is expensive, and a house purchase can be one of the biggest transactions you’ll ever make in your life. That’s not the kind of money most people would have just lying around.

Still, owning a house is one of the biggest goals of the American Dream, which is why a good number of laws have been enacted over the years to protect everyone’s right to equal opportunity housing. Today, even if you have less than twenty percent of the cash needed to buy a house, you can still be given a chance to purchase it through mortgages depending on your credit score.

In this article, we will talk about credit and the opportunities you can get depending on the score you are rated. Think the one you got is too low? You might be surprised at what you find out!

How low is too low?

Credit scores are essentially trust meters. However, in no way can a credit score describe a character. Everyone gets to a point where they might struggle to pay their bills on time, but often, these are due to factors that are out of our control. If you have a low credit score, it doesn’t mean you’re a bad person. The only people your credit score will matter to are the people you will be applying to for loans.

But, how low is too low? And at what credit range is it impossible to get approved for mortgage loans?

FICO Score

Last year, the average American FICO score reached an all-time high of 710. The FICO Score, from the Fair Isaac Corporation, is the most common credit score referred to by the biggest credit reporting bureaus: Equifax, Experian, and TransUnion. This finding was shared by the 2020 Consumer Credit Review of Experian, and in the same study, they reported that more than half of Americans (69%) held an at least good enough FICO score of 670 or higher.

With a score of 670, you’d be eligible for almost any type of mortgage you would want to set your sights on. But don’t despair if your score is nowhere north of this range.

FICO scores range from 300 to 850, and according to FICO itself, a poor score is less than 580. So from 580 to 669, your rating is still considered fair.

Did you know that even if you score a rating less than 580, you’d still be eligible for a home loan? We’ll discuss this and more in the next section below.

The Minimum Credit Score Needed to Buy a House

They say that there are different strokes for different folks. For example, some people might be satisfied living in humble cottages in the countryside, while others would not rest until they get to live in the mansion of their dreams.

Depending on how much house you think you need, you might need a government-insured loan or a conventional loan. Below, you’ll learn the minimum credit score required for each type of loan.

FHA Loans

Since these are loans backed by the Federal Housing Administration, FHA loans are mortgages that the federal government insures. As a result, this loan type has always been one of the most popular. Moreover, since it only asks for a minimum credit score of 500, it is the go-to option for first-time home buyers and those with low to moderate income. Indeed, this recourse was created with this demographic in mind to ensure that there will always be equal opportunities available to citizens who want to chase the American Dream.

If potential borrowers can even slightly improve their credit rating to get a score of 580, they can even be allowed to borrow up to 96.5% of their house’s original purchase price.

Conventional Loans

On the other hand, if your credit score is slightly better than 600, you might be eligible for a conventional loan. These are mortgages you can borrow from private mortgage lenders, but since the federal government does not insure them, you will need to pay for private mortgage insurance if you make a down payment of less than 20% of your home’s purchase price.

You will also need a standard minimum credit score of 620 to qualify for a conventional loan. However, you will find that some lenders for conventional loans will not accept a score lower than 640.

VA Loans

A VA loan is another government-backed loan, but this time insured by the U.S. Department of Veterans Affairs. Again, it is an exclusive benefit of working for the country’s military. If you are indeed eligible based on your occupation, you can take advantage of some of the best interest rates in the mortgage industry as well as purchase your own house with zero down payment required.

To qualify for VA loans, it is not enough to be an active duty service member. You will also need to have a minimum credit score of 640.

USDA Loans

If you are ineligible for an FHA / VA loan if you do not have any savings to make a down payment or don’t have any military experience, a USDA loan is your next best bet.

The U.S. Department of Agriculture insures this mortgage, but you don’t have to go into farming to qualify for it. Instead, it would help if you bought your real estate in a rural area to be considered.

The minimum credit score requirements for USDA loans are a lot less loose than for other mortgage types. You will notice that if you have a credit score of at least 640, you might get a smoother application experience. On the other hand, if you have a lower credit score, you might be asked to explain the circumstances that impacted your credit rating.

Credit Scores and the Mortgage Industry

As we have discussed above, different mortgage types have different minimum credit score requirements. And even if you have a credit score of 500, which is considered very poor by the FICO standard, you can still get a shot at owning your dream house.

According to Experian, more than half (62%) of borrowers who fall under the very poor FICO range tend to go delinquent on at least some of their debt. This is why many mortgage lenders will not even consider the applications of people with lower credit scores. If we put ourselves in their shoes, it can be pretty hard to blame them.

However, the good news is that an astounding 99% of people have FICO scores that rate above 500, which means that just about everyone has a fair chance of getting the house they want.

What do I do if I am one of the 1 percent?

If you do find out that you are one of those people who do not cut, though, we’re still here to give you a few tips!

Based on the loan types we have shared with you previously, what score do you need to purchase that home you’ve been eyeing? With this aim, you can then take some of the steps we’ll identify so that you can raise your credit score in a fast as a few months.

Check your credit report.

Credit scores change a lot. In fact, it can change about as often as you pay your bills. Therefore, improving your credit score will require that you check your credit report as often as you can.

Did you know that you are actually entitled to a free credit report from the three major credit reporting companies?

This is important because mistakes happen, and an error on your credit report is the last thing you want to see before you start applying for mortgages. Therefore, these must get corrected in time so that you don’t have to experience any delays.

Pay your bills as early as you can

Since you have a very poor credit score, this can only mean one of two things. You either have too little information in your credit history for the reporting companies to tally in your score, or you may have been delinquent in the past for any debt you may have owed. If the latter is the case, then it will depend on how long ago your delinquency was before you might be able to get your score where you want it to be.

The surest way to improve your credit score is to make sure you always pay your bills on time. For FICO, 35% of your credit score is for payment history alone, so consistent good behavior on your responsibilities can have a significant impact by the time you get your next credit report.

On the other hand, if your situation is the former, i.e., you might only be fresh out of university and into the employment pool, there’s no need to worry! Credit scores rely on credit background, so as you grow in experience and acquire more relationships with financial institutions, there’s nowhere to go but up. Just make sure you always spend within your means and put away enough in savings, and you’ll be able to buy the house you want.

Today, we hope to clear some of the cobwebs in your mind about credit scores and mortgages. Remember, your credit score is just a number, and you need to keep your eyes on the prize!