The different needs and circumstances of borrowers call for varied types of home loans. For…
Whatever plans you may have for yourself in the future will most likely include having your own house. After all, that’s the American Dream, and you can’t just keep renting forever.
With this in mind, whether we like it or not, we will eventually have to deal with the reality of credit scores. This is the FICO Score you can get from Experian, Equifax, or TransUnion. And, depending on where your score falls from 300 to 850, you might pay for either a more expensive than usual loan or a much cheaper house overall.
On the one hand, it is easy enough to get your credit score. You are entitled to get a free annual credit report, anyway, and there are already many free online tools that can help you monitor your credit rating. But, on the other, how do you know if this credit score is good enough for a mortgage loan?
Well, you will need to decide what kind of mortgage is best for you, and once you know which type this is, you can learn about the credit score to get approved.
Together, let’s find out which kind of mortgage you will be eligible for this 2021. If you previously had no idea what to do after getting your credit report, we hope you leave this article with a clearer plan for your future.
All About Credit Scores
Before anything else, let’s make sure you understand the importance of credit scores to mortgages.
Mortgages don’t just actually look at your credit score. Lenders will want to know your debt-to-income ratio; they’ll want to learn all about your employment history, and you’ll have to disclose how much in assets you have accumulated at this point. But a credit score is needed to qualify for a mortgage because it tells lenders how responsible you have been with your debt.
A higher credit score can show that you are deserving of a higher loan amount and better terms, while lower credit scores show a bleaker picture with you as a riskier borrower. So it is a logical system overall. In fact, if you put yourself in the shoes of mortgage lenders, you’ll want to ask the same questions as a stranger who approaches you to borrow a big amount of money.
If you meet the lender’s minimum credit score requirements, your credit score can play another role by determining how much money you are eligible to get, how much down payment you will need to deposit, and how much interest should be charged to your loan.
Minimum Credit Score Required for Home Loan
Now that you understand your credit a little bit better, it’s time to learn to take a look at the best options the market currently has to offer.
Strictly speaking, these are not the only choices you will get out there, but these are the most common, and these offer the best terms. Of course, some kinds of mortgages will really aim for you to get approved no matter what your credit standing is, but for your benefit, it would be better to avoid these to avoid any hidden fees.
Your credit score is not just a measure to tell mortgage lenders whether you should be lent money; it also tells you if you are ready to take on a loan. In your mortgage journey, you’ll come across all types of people who might have an interest in our mortgage decision. To stay on the safe side, it’s always best to listen to what your FICO Score tells you.
There are two main categories of mortgages: home loans that government agencies guarantee and those backed by private entities.
For government-backed loans, you have to make sure that the house you’ll be buying becomes your primary residence for at least one full year, so you cannot use these loans on investment homes or secondary homes. And since you can only have one primary residence, this means that you can only have one government-backed loan at a time.
1 – FHA Loan
The Federal Housing Administration ensures the first one we’ll talk about.
You’ve probably already heard of FHA loans yourself because these are principally targeted towards first-time homebuyers or those in low to moderate-income brackets.
Since credit scores are critical to qualify for a loan, it only makes sense that the great majority of people with low credit scores will probably not be able to get approved for mortgages. But with the FHA loan, it becomes possible for many Americans to buy a house despite poor credit.
Even a low FICO Score of 580 can let you qualify for an FHA loan and make as little as a 3.5% down payment. And in case you do have an even lower credit score, borrowers with scores from 500 to 579 can still apply as long as they can raise funds for a 10% down payment.
The only catch about this type of loan is the mortgage insurance. There’s no getting out of it. You have to pay a fee that protects the mortgage lender, and you have to pay for this for the whole life of your loan.
2 – USDA Loan
As the acronym implies, this type of loan is guaranteed by the U.S. Department of Agriculture.
The USDA loan hits two birds with one stone by promoting the use of rural real estate while at the same time offering this great option to disadvantaged citizens because, with this loan type, there is no particular credit score required.
If you want a smoother application process, a 640 credit score is preferable because you can get automated underwriting. On the other hand, if your score is lower, you’ll have to go through manual underwriting and provide further documentation about your finances. But, again, this is just to give the mortgage lender a better picture of your situation and finances.
Despite the limitation location-wise, people are still drawn to the USDA program because this doesn’t require any down payment, so if you are raring to live in the countryside and you really just don’t have that much in savings just yet, this may be the best home loan for you.
3 – VA Loan
If you’re really looking for the best mortgage out in the market this 2021, VA loans are definitely king at the moment.
Unfortunately, not all home buyers can qualify for this even if they meet the minimum credit score of 640 because this is mortgage-backed by the Department of Veterans Affairs. In addition, you will need to have military experience to apply because this is a job benefit for our brothers and sisters in the service.
We say that this is currently the best choice in the industry because, like the USDA program, you don’t need to make any down payment. Instead, you need to pay a VA funding fee, which can be as low as 2.3% of the loan amount.
Mortgage lenders can also let borrowers get more money because of their confidence in the Department of Veterans Affairs. The interest rates are great, and you can buy a house anywhere in the country. It basically has all of the best features of USDA and FHA loans without the downsides.
Now, let’s head on to the type of mortgage that the government does not insure.
These are called conventional mortgages. Although the government may not back them, they are still overseen by two government entities: Fannie Mae and Freddie Mac, which set the loan limits for these mortgage loans.
Often, people will have to choose between the FHA and conventional. This is because these mortgages don’t have the same limitations that the USDA or VA programs have. You can have any profession, and you can buy a house anywhere you want.
Conventional loans also do not ask for that high a credit score. They ask for a minimum credit score of 620, but this doesn’t even fall in the good credit range as far as FICO is concerned. If you do have at least a 620 credit score, however, the conventional loan type will definitely be a much better option because you have the opportunity to skip mortgage insurance.
For conventional loans, this insurance is called PMI, which stands for private mortgage insurance. Unlike an FHA loan, you have a way of getting out of paying this fee, but only if you have enough money for a 20% down payment. The good news is, once you have paid enough on your mortgage to earn as much as 22% home equity, PMI automatically falls off the next time you need to make payment.
The ideal strategy is, if you can only do FHA for now, you can improve your credit so that you can eventually refinance and get a conventional mortgage for your house.
Which Credit Score
To know how much credit you need to buy your dream house, you basically have to choose from among the mortgage loans we have mentioned.
Each one has its own credit score requirements, but it is important to note that many lenders may not particularly observe these norms. You can still get rejected for a conventional mortgage by one lender even if you already have a score of 620, but you can always apply to another.
Just as no two houses are the same, mortgages are tailored to suit your particular needs and circumstances. Whichever one you get, we wish you the best of luck in your journey!