The different needs and circumstances of borrowers call for varied types of home loans. For…
If you want to qualify for a mortgage, it is inherent that you become aware of minimum credit score requirements. Each type of loan has benefits for particular borrowers and situations.
There’s a mortgage that can be great for you if you plan to buy a house in a small town. And there’s a home loan that can be very helpful if you are a first-time homebuyer.
Not all mortgages will have the same features. If you have the time needed to improve your credit score, you can target a particular rating to get a higher chance of getting approved for the home loan you want.
So today, let’s find out which home loans/credit score you should be going after. Of course, you might already be eligible for a lot, but it’s best to be sure that you are shooting for the correct target!
If you’re a little worried about checking your credit, it’s essential to know the difference between a request you make yourself and a lender’s request for your credit report.
When you check your credit by yourself to see what it says, this is what’s known as a soft inquiry. Here, there’s no need to worry because it will not affect your credit score. But, on the other hand, when you apply for a credit card or any loan, and the bank checks your credit history, this is a hard inquiry on your report, and you will lose some points.
Since it is mandated that you are entitled to a free credit report from Annual Credit Report, finding out your credit score should be no problem.
What your credit says about you
Do you think you are a responsible borrower? Well, there’s one way to find out. But aside from showing a snapshot of your recent payment history, your credit score can also imply something about your financial circumstances. It is not always a borrower’s fault when they get into some bad credit.
Sometimes, you meet an accident or get ill enough to warrant a visit to the hospital. And, if your stay won’t be covered by insurance, your savings and credit can take a beating. You might also get unlucky and walk into an auto dealer one day, and then, without you realizing it, they already run your credit for all these loans. This kind of action can take a lot of points off your score!
Whatever level your credit is at this point, we want to assure you that there will still be a way to qualify for a mortgage. There are even Americans who consciously do what they can to become credit invisible. So when a lender tries to pull their credit report, there’s absolutely nothing to find! Today, even people who do not have a FICO Score can buy a house with a mortgage, so know that if you already have a credit score or at least some info on your report, you already have a headstart.
Whether you’re getting your credit report from Experian, Equifax, or TransUnion, the credit score you will most likely see will be your FICO Score.
FICO, which stands for the Fair Isaac Corporation, is synonymous with credit scores as Coke is with soda. Since this is the case, know that when we talk about credit scores in this article, we’re using the FICO scoring system as our basis.
And this is how FICO defines each range of credit scores:
- 300 to 579 = Poor
- 580 to 669 = Fair
- 670 to 739 = Good
- 740 to 799 = Very Good
- 800 to 850 = Exceptional
As of this writing, the average FICO Score in the U.S. is 711. This can sound very intimidating, especially if you find that your score is below this number. Remember, though, that this score still falls within the Good range. More often than not, even a credit score of below 670 can still be good enough to qualify you for a mortgage.
Borrowers can be classified by what kind of FICO Score they have. On the other hand, mortgages can be grouped according to who guarantees the transaction. When you get a home loan, the lender temporarily foots the bill with the house seller, and then you slowly pay back this money over several years. Since mortgages mean an excessive amount of money, who has the lender’s back on the off chance you default?
There are two main types of home loans: government-backed loans and conventional loans. As the terminology implies, the first is insured by the federal government while the other is not.
Let’s tackle the traditional type before we head on to government-backed mortgages.
Minimum credit score: 620
If you have this idea at the back of your mind that it’s hard to qualify for a mortgage, it may be because of traditional loans.
Today, when we say traditional, we mean conventional loans. These are your regular Fannie Mae and Freddie Mac mortgages, which tend to ask for higher credit score requirements the more considerable your loan amount.
There is a misconception that aside from needing a high credit score, you also need to have a 20% down payment ready in the bank to get approved for this mortgage. But the truth is, you will most likely be allowed to pay as low as a 3% down payment for a conventional loan. People think of the 20% because this amount saves you from paying for mortgage insurance. This kind of insurance assures the lender just in case you stop paying back your loan. The idea is, if you have less than 20% equity in the game, there’s a higher chance you will walk out on your mortgage.
So if you can pay 20% at closing, you don’t have to pay for the mortgage insurance. On the other hand, pay less than 20, and you will have to wait until you earn 20% equity before you can request for insurance to be taken off your monthly payments.
Under this umbrella of mortgages, there are also two categories of home loans: non-conforming loans and conforming loans.
So we can give you a general idea, non-conforming loans are those that let you borrow a lot more money; what they’re not conforming to are the usual loan limits set by Fannie Mae and Freddie Mac. These mortgages tend to be more expensive, so they are a lot less common. However, if you plan to buy a house for personal use, you will likely get a conforming loan.
Minimum credit score: ~580
Relatively speaking, the best type of mortgage in the market at the moment is the VA loan which the Department of Veterans Affairs guarantees. Unfortunately, you can only get this mortgage if you are a service member, a veteran, or a surviving spouse of a veteran who has passed.
There is technically no minimum credit score needed if you want to qualify for this loan type. But, as we’ve mentioned, 579 and below credit scores are indeed in the Poor category of credit scores, and it can be exceedingly hard to find a lender who will let you get a VA loan with this kind of rating. With 580, you might get a better chance, but a much higher score will give you the best scenario.
VA loans have been gaining momentum because of recent legislation that now allows veterans to buy bigger homes. What makes VA loans great, though, is that you don’t have to make a down payment. So if you have little or no savings right now, as long as you have stable employment and you can still pay for closing costs, you’ll be able to get yourself a VA mortgage.
Minimum credit score: ~640
Now, if you haven’t served or have no plans of joining the military but want to buy a house without making a down payment, you can opt to apply for a USDA loan.
As you might guess, this loan is insured by the U.S. Department of Agriculture, and they do this to encourage more Americans to live in rural areas instead of larger cities. However, they do have their definition of what a rural location is. So even if you don’t think the house you’re eyeing is in a rural neighborhood, it’s worth finding out.
In actuality, there are no minimum credit score requirements for USDA loans, just like VA loans. But if you’re getting a USDA loan, they tend to ask for more information if you have a credit score below 640. This kind of credit might mean that you have either Fair or Poor credit, and they’ll want to get a more exact picture of your financial situation. Remember, you don’t need to make a minimum down payment for this type of loan, and this often makes lenders feel that it is easier for you to default on your mortgage.
Minimum credit score: 500
Last but not least, the safety net of all home buyers is what we call the FHA loan. The Federal Housing Administration backs this under the Department of Housing and Urban Development.
Due to its low credit score needed to qualify for this mortgage, this is one of the most popular mortgages. Even if you’ve had late payments or haven’t a lot of experience borrowing money in the past, there’s an excellent chance you can still be approved for this loan.
That said, this type of loan should also be regarded as a break-glass-in-case-of-fire option because it can be costly, especially for a first-time homebuyer. This is due to the unavoidable mortgage insurance, which is charged in two ways.
First, regardless of how much you pay at closing, an upfront 1.75% mortgage insurance fee will be charged to you. And then, you will need to pay another insurance fee that will show up on your charges monthly depending on how much down payment you made. For example, if you pay at least a 10% down payment, this monthly insurance goes away after eleven years. However, for FHA loans, if you get a credit score of at least 580, you are allowed to make just a 3.5% down payment. In which case, you’ll be paying a monthly mortgage insurance fee for the whole life of the loan.
On the upside, you can get money for the down payment from gifted funds or cash grants when you get an FHA loan. Like, if your parents are willing to help you buy a house and want to gift you money for a down payment, this is okay for an FHA loan. Also, if there are down payment assistance programs in your locality, these are usually partnered with FHA loans.
We hope that you now have a better idea of which loan type you should be pursuing at this point.
If you want to keep your savings and make no down payment, you can go for VA loans or USDA loans, depending on your eligibility. On the other hand, if you don’t mind paying money down, you can decide how much you are willing to pay if you want to skip mortgage insurance for an FHA loan or a conventional loan.
Note that at the end of the day, it’s always going to be better to have some equity in the bag so you can achieve homeownership much sooner.
Safe travels on your mortgage journey!