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A mortgage application can be a very daunting task, especially during a global pandemic. Yet, you keep wondering if it is worth delaying such a drastic move.
For many of us, mortgages are just a fact of life. But, COVID-19 or not, we have no choice but to keep beating against the current.
Inevitably, the first point you have to grapple with will be your credit score. If you want to qualify for a mortgage, you have to meet a minimum credit score requirement. But mortgages are not exactly taught in school, and many Americans will probably have no idea what kind of credit score they will need or the myriad of home loan options they can choose. This article hopes to bridge that gap.
Today, let’s set those worries aside and put our thinking caps on. It’s time to learn the necessary information to know that will get you mortgage-ready this 2021.
(Note: This article refers to the FICO Score model since that is the most commonly used system by credit bureaus.)
What are mortgages?
Mortgages sound so serious, but they are just another kind of debt.
A mortgage is a secured type of loan. By secured, this means that if you stop repaying your loan, the lender gets something of yours in return. In this case, you lose ownership of your house, and the mortgage lender sells it to recoup their loss.
Amortization is also something that makes mortgages more complicated for people. You don’t repay the mortgage lender with a one-time payment. Instead, you make an initial payment that includes deposit and closing costs, and then you get charged for installment every month. But you don’t merely divide your total loan by the number of months you have to pay. Interest rates change, and sometimes, mortgage insurance is also involved. Unlike other loans, mortgages deal with an incredible amount of money paid over a very long period.
The way amortization works, it can be hard to imagine how much your house will eventually cost once you’ve made the final payment on your loan. That’s why it’s critical to choose the best loan terms right off the bat, avoid paying for insurance, and make the most significant down payment that your savings will allow.
What’s in a credit score?
The next thing we need to understand is our credit score.
Because credit scores are presented as a number, it can be terrifying to find out what we have if we have no basis for comparison. It’s like finding out your marks in school. Credit scores are not exactly something we include in our social media profiles either.
For FICO, scores start at 300, with the highest one being 850. But, of course, it’s possible to get no credit score at all. Around 45 million Americans might not even have a credit score today. It simply means that you don’t have enough credit history yet of generating a rating.
Usually, it takes at least two credit accounts with at least six months of activity to get a more accurate picture. Your credit report will contain all of the data accumulated from the moment you opened your first credit account to the last payment reported by a financial institution. So it’s possible to get varying scores from different bureaus at different periods.
Several factors contribute to our FICO Score. Chief of these factors is our payment history. However, it is essential to know that focus is heaviest on the data recorded for the most recent period. Therefore, if you’ve made a late payment before but it has been long enough from the present, it actually may not affect your score as much as a late payment you made during your latest billing cycle.
If you consistently pay your bills and avoid maxing out your credit card limits, you have a great chance of getting a good credit score. Lenders rely on these ratings to predict whether we will be responsible borrowers if approved for a new loan.
Just for reference, FICO grades credit scores according to the following categories: Poor (300 to 579), Fair (580 to 669), Good (670 to 739), Very Good (740 to 799), and Exceptional (800 to 850). Your credit score of 600 falls within the Fair range.
If it is your first time to request your credit score, you should know that mortgage lenders ask for your credit reports from the three most significant credit bureaus. It’s not enough to merely know your score from one source. If you get different credit scores from Equifax, Experian, or TransUnion, mortgage lenders refer to your middle score instead of getting the average of the three scores.
Can I get a home loan with a 600 credit score?
So now let’s talk about the top concern of the day.
You have just seen your credit report, and you are naturally thinking of which mortgage loan you can qualify for with a 600 credit score. The short answer to your question is a lot, and this is excellent news! But let’s expound on that answer some more.
There are probably thousands of mortgage loan offers you can find on the market today. But there is no one option that would be perfect for everyone regardless of background. For example, a borrower might want a 15-year loan term, while another might want to buy a house out in the country. Different needs demand varying options.
You might qualify for some of these home loans, but then again, these may not exactly be what you need. To get a handle on that, ask yourself some of these questions:
- What is my purpose for buying this house?
- Will I be living in it, or will I be renting it out?
- How much money have I saved up?
- Am I willing to use this money as a down payment on a new house?
Then, let us count your home loan options.
The following are government-backed loans you are qualified for due to your 600 credit score. Note that because these are government-insured, the house you’ll buy must become your primary residence for at least 12 consecutive months.
1 – FHA Loans
If you buy your first home, a mortgage insured by the Federal Housing Administration can help you.
According to data gathered by Zillow, first-time homebuyers today are less likely to be married, so they are usually single, with savings that have relied on an income that has not significantly increased in the last couple of years. With this in mind, they may be more likely to come from a moderate to a lower-income background. They may also have lower credit scores simply because they have less experience borrowing money, and they may have fewer savings in the bank.
FHA loans are perfect for this type of borrower, although this mortgage deal is available to every American, as long as they have a credit score of at least 500. If you have a credit score of less than 580, you must make a 10% down payment. On the other hand, if your score is at least 580, you can pay as low as 3.5 percent.
Be warned, though, that paying lower at closing can mean a more expensive mortgage. This is true not just for FHA loans but for other mortgage loans as well.
Not all mortgages require payment for mortgage insurance. Unfortunately, FHA loans are one of those that have this kind of fee. Even worse, there are two kinds of mortgage insurance you have to pay over the life of your loan: one upfront and one monthly. If you want to get it cheaper, spending at least a 10% down payment on your mortgage will be better because monthly mortgage insurance is lifted after eleven years. Otherwise, this fee stays for the life of your loan.
Finally, one of the benefits of getting an FHA loan is the possibility of getting help from down payment assistance programs. Most people have to pay their down payment out of pocket, but the FHA allows borrowers with lower credit to get their down payment from grants.
2 – VA Loans
This next option will not be available for many people, but those who will indeed be eligible for it would be lucky indeed.
As their job benefit for serving the nation, our service members and veterans can get assistance from the Department of Veterans Affairs when they want to buy a house. They are neither required to make a down payment nor pay for mortgage insurance through a VA loan.
Regardless of any down payment they make, the mortgage lender is assured 25% of the home’s value. So they can feel more confident approving a higher loan amount, giving a lower interest rate, and allowing better terms.
The VA technically advises no minimum credit score for this type of loan. However, since the start of the COVID-19 pandemic, lenders now prefer a score of 600 or higher. Therefore, be informed that while you already have a 600 credit score, even if you are an eligible service member or veteran, it can still be hard to qualify for a VA loan in 2021.
3 – USDA Loans
If you don’t satisfy the VA loan requirements but are dreaming of a no-down-payment home loan, there’s another option you can choose! That is if you are willing to buy a house in a USDA-approved rural area.
On the upside, the vast majority of the U.S. is eligible for a loan backed by the U.S. Department of Agriculture. The location doesn’t have to be a farm, and this loan is strictly for residential purposes. However, you also have to make sure that you and all other household members have a total income that exceeds the limit prescribed in the area. They require this to ward off a possible abuse of the system because the program is designed to help more disadvantaged Americans.
That said, the USDA loan also does not ask for a minimum credit score. A 600 FICO Score can give you a fair shot, although it will help you a lot more if you get a credit score of 640 or higher. Your application may go into deeper scrutiny by the lender during the underwriting process at your current rating. After all, 600 is still below the Good range of FICO Scores. They will want to know if you’ve had a default, you are behind on other debt, or just why you haven’t earned a higher credit score.
The bottom line is, it’s okay to feel nervous when you’re applying for a mortgage. Unfortunately, many of us will only experience this once in our lives. But do know that there are options for you even if you have a lower credit score.
It is always best to work on your credit so you can meet the minimum credit score requirements of all the best mortgage lenders in the industry. In addition, you’ll get the most value for your money if you don’t need to pay high interest or mortgage insurance.
Lastly, it might sound incredible to get to keep your money a while longer when they don’t require a down payment, just remember that your interest will add up if you do so. So aim for the fastest time you can gain home equity by making a larger down payment. Trust us. It’ll be worth it!