So you've been saving all your life, putting away all of your extra money, and…
Even people who have absolutely no credit history can actually buy a house through a home loan. However, getting approved for a mortgage without a credit score can be a pretty grueling process. That’s why the easiest way to aim for the mortgage you want is by building your credit history and meeting the minimum credit score requirements of mortgage loans.
But do you know the credit score required for the home loan you are eyeing? Are you aware of your credit score, and are you looking to increase it?
Credit scores are an essential criterion mortgage lenders use for determining whether home buyers are eligible for home loans. Through this number, they’ll be able to tell if you can be trusted with money and if you have the capacity to repay a mortgage.
With all the options for loans out there, your credit score will become your limit in finding out what kind of mortgages you can apply for. In this article, we’re going to talk about these different types of home loans so that you can get a better idea of your mortgage choices. If you are worried about this facet of your future, we hope you learn enough from here that can help you improve your credit score.
You can actually get a home loan no matter your credit score, but the higher you raise it, the bigger your world becomes. Read on to find out how.
Your FICO Score is important, not just for getting a mortgage but also for renting an apartment, getting issued a credit card, and more.
Aside from learning to invest, monitoring your credit score is one thing that you would do well to get started on as soon as you get out of school. You don’t even have to spend to get this information for yourself. You can request a free copy of your credit report annually.
It’s also not enough to learn your credit score from only one of the three major credit reporting bureaus. Especially when you apply for a mortgage loan, you will want to know your FICO Scores from Equifax, Experian, and TransUnion individually. This is because these three companies can actually come up with three different credit scores for each person. And when this is the case, lenders will be using the middle value as your official credit score for the application. This means that if you inquire at only one company, you won’t really be able to see the bigger picture, and you might come unprepared when it’s time to determine if you are eligible.
How do they compute for our credit score?
Since your FICO Score is most often referred to when lenders inspect your credit score, let’s refer to the FICO scoring system.
Your credit score is calculated as follows:
- 35% history of payments
- 30% amount owed
- 15% length of credit history
- 10% requests for new credit
- 10% types of credit
As you can tell from how they find out our credit scores, payment history is the most important part of a person’s FICO Score. Every time you make a late payment or pay less than the minimum amount required, this is reflected in your credit report, and points are knocked off for each occurrence. Most people get lower credit scores for this reason, but some of the time, people get less than ideal FICO Scores because they don’t have enough information to show in their history.
The amount owed is important because it can help show lenders your debt-to-income status. This basically refers to the fraction of debt from your monthly income, which tells lenders if you are making enough money to keep making payments for your necessities.
Another reason why the amount owed is significant is what this says about you as a borrower. Are you spending too much money compared to the lines of credit you are allowed? If you are already at your credit’s limit, why are you still looking for newer credit? With your history of payments, which will tell lenders if you can pay your bills in full every month, they can find out if letting you borrow money is a risky enterprise.
Length of Credit History
It doesn’t matter to lenders if you are older or younger biologically. What matters to them is how experienced you are when it comes to borrowing money. Even if you are younger, if you have maintained a good relationship with financial institutions for a long time, this shows lenders that you are a trustworthy borrower.
To keep this component of your score high, it will be good to keep credit cards even if you don’t actually use them. They’re not just useful for a rainy day. A credit card with your name on it can fill your credit report with enough payment history for a satisfactory credit score.
Requests for New Accounts
Every time you apply for a new credit account, you actually get a few points taken out of your credit score.
Whenever you request to see your report, this is called a soft inquiry, and it does not affect your credit score. But whenever banks or lenders make a hard inquiry of your report to find out your credit score, this is recorded, and other lenders pay attention. So a new account presents a risk, especially if you are already maxing out your credit cards.
Is this person going to run with the money? Why are their other lines of credit no longer enough for their needs? These are questions that lenders will want to be answered.
Types of Credit
Finally, aside from the age of your credit accounts, the types of debt you have been able to master will speak volumes about your experience. It’s not enough to keep a credit card or two. Capability to pay other kinds of debt like student loans or car loans will speak highly to lenders about your eligibility to take on further debt.
What is bad credit?
FICO Scores range from 300 to 850, where 300 is the lowest FICO score you can get, while 850 is the highest. With this in mind, know that it is virtually impossible to get a FICO Score of 0; you either get a credit score determined from your credit history or don’t.
When you get a score that’s nearer to 300, this usually means one of two things. First, you may not actually have enough information in your credit report to generate a score. For example, maybe you have only recently activated your credit card, and you don’t have other credit accounts. Secondly, you might have had many missed or late payments made in the past, or most likely, a bankruptcy. It takes longer to recover from these than improving your credit by adding more payment entries in your report.
Credit Score Ranges
This is how FICO officially defines good and bad credit:
- 300 to 579 score – Poor
- 580 to 669 score – Fair
- 670 to 739 score – Good
- 740 to 799 score – Very Good
- 800 to 850 score – Exceptional
Scores that are below 670 are the ones that are considered as bad credit. But as you’ll learn, it’s not the end of the world even if you have this kind of score. There are home loans that are particularly meant to provide options to those who have lower credit scores. According to Experian, nearly all consumers actually have a credit score over 500—which is the credit score that will matter to most.
To understand this, it’s time to learn what we can about home loans.
A mortgage is a loan type where you put up your house as collateral if you fail to pay the debt in full. That is why they call it a home loan.
The type of loan you will want to get approved for will depend on several factors, like how much savings you have put away, how much income you make in a month, or how many houses you are looking to buy. For this reason, the ideal home loan for one person might not be the best for another.
People might also want to get a mortgage even if they actually have the money to buy a house, keeping in mind that owning a home tie up a significant amount of your cash to real estate. For most homebuyers, however, it is necessary to apply for a mortgage because they cannot delay this security when they already have enough savings in the bank.
Each loan type has its own credit score requirements. Here are some of the most popular kinds of mortgages that you might encounter as you shop around.
Let’s start with the traditional type of mortgage.
Conventional loans require a minimum credit score of 620 while falls in the fair range of FICO Scores. Based on how much greater your score is to 620, you might be asked to make a larger down payment or pay a higher interest rate. In addition, with a conventional loan, you are obligated to pay for private mortgage insurance if you make a down payment of less than 20 percent, which can significantly increase your loan costs in the long run; however, this necessary fee falls off once you achieve at least 22% home equity.
The loan limits of conventional loans are determined by Fannie Mae and Freddie Mac, and you can generally borrow a much higher amount of money with this type of loan than government-backed loans.
When the federal government insures your mortgage, what you have is a government-backed loan. So the first one we’ll discuss is a mortgage guaranteed by the Federal Housing Administration.
The absolute minimum credit score needed to qualify for an FHA loan is a 500 credit score. However, if you need a low down payment amount, you’ll be better off with a 580 score. With a 500 score, you’ll be asked to make a payment of at least 10% of your home’s purchase price. On the other hand, with a 580 credit score, you need to provide a 3.5% down payment.
FHA loans were created to provide opportunities to first-time homebuyers who might have a lower credit score or live on low to moderate-income. That’s why with FHA loans, you don’t even have to pull from your savings to make a down payment. Instead, the Federal Housing Administration allows up to 100% of your deposit to come from cash gifts or grants.
Compared to the benefits of FHA loans, this next mortgage type can be a better one to have, but you can only be eligible if you have served in the nation’s military.
As you might tell from how it is called, a VA loan is insured by the Department of Veterans Affairs. And among all the loan options we’ll mention, this is the one we recommend the most. Aside from having some of the best interest rates in the mortgage industry, VA loans will also not ask for a down payment to secure your loan, but that’s only if you are a veteran with a minimum credit score of 640.
Most mortgage types have minimum credit score requirements. However, this is not true for USDA loans.
When you apply for a loan guaranteed by the U.S. Department of Agriculture, a credit score of 640 is preferred because this will help your application get automated underwriting. However, if you have a lower credit score, you might still be found qualified after a manual underwriting process wherein you will be asked more background about your income and financial history. With this application, your credit score’s story will be taken into account so that you might be allowed to enjoy the benefits of zero down payment on a mortgage for rural real estate.
The Right Mortgage For You
There you go!
There’s technically no minimum credit score needed to qualify when it comes to mortgage loans. Some people can get by with a zero history of debt, although this does not mean they also have a zero credit score. All it comes right down to is if you will be able to satisfy the application requirements of different mortgage lenders.
That’s right, even though there are standard minimum credit scores defined for each kind of mortgage that we have shared here, mortgage lenders will still have the final say if you can get approved. For this reason, we recommend improving your credit score even before you get to the point that you need to apply for a mortgage because this raises your chances of getting approved as well as lowers your interest rate and other fees to pay.
Check your credit as often as you can. Remember, soft inquiries will not hurt your rating! The best mortgage for you is out there, and it’s up to you to grab this opportunity as soon as it presents itself.