Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
Buying a house is an exciting new adventure. But, unfortunately, if you’re doing it this 2021, it can also be a very challenging endeavor.
The real estate market keeps getting hotter and hotter, and it’s not just the prices. Homebuyers are getting more competitive that some are even adding 10,000 or 20,000 dollars as cash payment just to get chosen by the seller. And this is still due to the COVID-19 pandemic. As more people realize that they want more space to move around without fear of infection, more people are moving out of cities into suburbs.
There’s a perfect chance you came across this article because you just got your credit report. And seeing that your credit score is 630, you got to wondering what your mortgage prospects are and what you can do with this kind of credit. On the one hand, you do have quite a lot of options with a 630 FICO Score, but on the other, there’s still room for improvement if you want to save just a little bit more money.
Let’s find out what these prospects are!
Options for 630 Credit Score Home Loan
Just as there are many houses on the market that you can choose from for your new home, many different lenders and types of mortgages you can turn to for help if you don’t have enough cash for this big purchase.
Different borrowers mean different preferences, and different types of mortgages mean different credit score requirements. So we won’t be able to tell you what the best option will be for you. Only you will be able to judge according to your particular circumstances.
The following are your choices.
1 – USDA Loan
There are two general types of mortgages. There are those that the federal government ensures, and there are those that private institutions guarantee.
The USDA loan is a residential government-backed loan insured by the U.S. Department of Agriculture. Its main purpose is to encourage rural land use in the United States; that is why you are only allowed to buy a house in a USDA-eligible area using this type of mortgage. If you want to find out if the property you want to buy is qualified for this loan, you can input your details here.
One characteristic of this loan type that sets it apart from other types of loans is that it doesn’t have specific minimum credit score requirements. So even if you have a 500 credit score, it’s absolutely no problem, which is why with a 630 FICO Score, you’ll be welcome to apply. What it does take into scrutiny is your total household income, not just your own income, but the consolidated income of those living in the home. Depending on the average median income of the location where you want to buy a house, the USDA prescribes a household income cap to determine if you qualify.
Since you will be applying for a government-insured mortgage, the USDA loan also requires that the house you’ll be using as collateral for this loan becomes your primary residence. This automatically disqualifies you if you plan to purchase a house as an investment or a vacation home.
Despite its limitations, many people do continue to get drawn to the USDA loan program, and it’s not just because of its freedom from credit score requirements. With a USDA loan, you also don’t have to worry about making any down payment because you can borrow up to 100% of your home’s purchase price.
2 – FHA Loan
This is the type of mortgage that you will most likely have heard of before. FHA loans are predominantly meant for first-time homebuyers, although you are not required to be buying a home for the first time. And because this is guaranteed by the Federal Housing Administration, as a government-backed loan, it can only approve your application if you will be using the house as your primary residence.
FHA loans are beneficial to first-time homebuyers because they accept applicants with a minimum credit score requirement of as low as 500. According to Experian, a mere 1% of American consumers actually have a credit score less than 500, which means that nearly everyone can actually buy a house through an FHA loan. This doesn’t mean, though, that an FHA loan will be the best deal for you. But, most likely, it is the only option left for you at this point if you will be going for a Federal Housing Administration loan.
With a credit score of 630, you do have other options aside from an FHA loan, but let’s talk a little bit about why it’s not the best option for most people.
Since an FHA loan is mostly suited for people with bad credit, it goes without saying that the people being lent to are the riskier type of borrowers. The FHA requires that you pay for a mortgage insurance premium together with your monthly payments to protect lenders. This doesn’t go towards your home equity, and this stays for the life of the loan. Now, this insurance might be a lot less than, say, the private mortgage insurance (PMI) required by traditional loans, but unlike PMI, there is no way to avoid this extra fee.
Borrowers who also have a credit score of 580 and higher are allowed to put as little as 3.5% down. Otherwise, you have to deposit 10% for a down payment. Now, if you only need to pay 3.5%, that sounds like a good deal, but you have to remember that the lower down payment you make, the more expensive you pay in interest. With the high interest and the unavoidable mortgage insurance, FHA loans can really become the most expensive type of mortgage for borrowers who are already struggling with their finances. If you can choose other options, we recommend you go for these others!
3 – Conventional Loan
Finally, if there’s a loan type we would highly recommend to you with a FICO score of 630, we suggest you apply for a conventional loan. These are non-government-backed loans and are most often referred to as Fannie Mae and Freddie Mac loans.
The standard minimum credit score required for conventional loans is a credit score of 620, and the basic rule is, the higher your credit score, the more money you can borrow and the better mortgage rates you can get.
Aside from credit score, however, what more people consider about conventional loans is the amount of down payment they can make. As we have mentioned, you have to pay for private mortgage insurance, but only if you make a less than 20% down payment. So if you want to avoid PMI altogether, make sure that you have at least 20% of the money saved up in the bank. On the other hand, if you can’t pay 20%, don’t worry because PMI automatically falls off once you gain at least 22% home equity.
Unlike government-insured loans, with conventional loans, there aren’t a lot of restrictions on the home you can buy as well as the reason you have for buying, so with conventional, even if you’re buying a house to make it a rental or you’re buying a house you only want to stay in once a year, it doesn’t matter. You can also buy a house anywhere you want in the country.
For many reasons, a conventional loan is just a better fit for someone with a FICO Score of 630. However, you should know that many lenders might still reject your application at this point. This is because mortgage lenders are really the only ones who can say who they can approve for the loans that they give out. But even as you get rejected by one lender, you can get approved by another.
Get That Mortgage!
If you do have a targeted lender, and you don’t satisfy their minimum credit score requirement, what can you do if you really want to get a mortgage?
Here are some things to remember to ensure you get approved for the exact loan you want.
1 – Your real credit score
Maybe you just thought that your credit score was enough to cut, but in reality, you were looking at the wrong FICO Score. You read that right.
When you apply for a home loan, mortgage lenders will get your FICO Score from three different credit bureaus: Equifax, Experian, and TransUnion. The reason for this is because these three credit bureaus can actually come up with three different FICO Scores. To evaluate your application, however, lenders only need one credit score for your file. But instead of computing for the average of your three FICO Scores, they actually get the middle number. So, for example, if you get 625, 630, and 645, your credit score for the application is 630—not 633, which is the average of the three scores.
Make sure that when you make a soft inquiry for your credit, you ask for your credit report from all three of these institutions.
2 – Check your credit report
Since you’re requesting for your credit scores anyway, you might as well check that every line in your credit reports is a fact. Then, if you don’t remember making any of the described actions, you can actually dispute them. Just take care that you never lie when you raise these complaints and do your own due diligence.
Errors are actually widespread in credit reports, which is a little bit shocking when you think about how important credit scores are and how they can mean the difference in the decisions we make. But they do happen! If you are worried about affecting your credit score every time you check your report, there’s no need to worry about it. When you check your own credit, this is only a soft inquiry, and it will not take any points off your score. You are also entitled to get a free credit report annually, so you might as well grab this opportunity to watch out for your credit rating.
3 – Increase your credit score
Needless to say, it will only work to your advantage if you do your best to improve your credit. Boosting credit is actually 90% just paying your bills on time. But you will also do well to observe the following other things:
- Avoid creating a lot of new credit in a short period of time.
- Keep your credit utilization on credit cards below 30 percent.
- Pay down whatever debts you can close before you apply for a mortgage.
- Retain your old accounts even if you don’t actually use these credit cards anymore.
So there you have it! We do hope you were able to learn a lot through the tips we were able to share. If you need more help, we’re always willing to provide whatever answers we can give.