In the wake of the holiday season, the latest data from the Weekly Mortgage Applications…
When you want to buy a house, but you don’t have enough savings yet to pay for a home purchase, what is the first thing that you should do? The answer: find out your credit score.
Credit score requirements can really make or break your mortgage loan chances. Depending on where you find yourself along the spectrum, you might need to delay your moving plans.
A lot of people indeed do not really know enough about their options. The mortgage application process is time-consuming and stressful to some that they don’t even bother to shop around. That is the biggest mistake homebuyers can make. When you don’t check on the mortgage rates that different lenders can offer you, you can end up paying a whole lot more.
So what kind of home loan can you apply for with your credit score?
Today, we’re going to focus on mortgages that apply to borrowers with scores of at least 640. If you didn’t know it yet, there are so many options you can choose from at this point in your life!
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Before we talk about mortgages, however, it’s important to know first if you’re looking at your true credit score. In case you are wondering what exactly we mean by that, we’ll explain.
There are three major credit reporting bureaus in the country: Equifax, Experian, and TransUnion. When you need to apply for a mortgage, it’s not enough to check your credit score from only one of these sources. Mortgage lenders will be asking them all separately for your score, and you actually might get different numbers from each of the three companies. However, only one credit score will matter to your application, and no, they won’t be getting the average of these scores.
Instead, lenders use the middle value in this set of credit scores, which they treat as your true rating. For example, you got a 632 from Equifax, a 644 from Experian, and a 647 from TransUnion. The average of these numbers is 641, but lenders aren’t even going to compute for this value. So for your mortgage application, your credit score is 644 from Experian since this is the middle value among the three credit scores.
At this point, you probably want to know if a credit score of 640 is a good or bad credit score to have. The short answer is, it’s not so bad, but you can definitely use a higher score down the road.
Why is a 640 credit score considered bad?
To be consistent in our discussion today, we will be referring to the FICO scoring system (Fair Isaac Corporation) whenever we say credit scores.
FICO Scores start from 300 and end at 850, with 850 being the highest credit score a borrower can achieve. Here is how FICO defines each credit score range:
- Scores less than 580 – Poor
- 580 to 669 – Fair
- 670 to 739 – Good
- 740 to 799 – Very Good
- 800 and above – Exceptional
As you can see, a 640 credit score actually falls under the “Fair” range. Many lenders will already consider this a lower credit score because any score that’s less than 670 is already bad credit.
As of 2020, the average credit score in America is 711, which is a record high value they say is due to the effects of the COVID-19 pandemic. That sounds a little bit surprising, but because people have been trying to prepare for the worst, more people have been doing their best to pay their bills on time.
To put that in perspective, a 640 credit score is already more than 70 points below the national average, so it makes a little more sense to see why it’s only regarded as “fair” credit.
As we have already mentioned, applying for a mortgage is your best option when buying a house, but you don’t have enough money. That is because a mortgage is a home loan where you borrow money with your house serving as collateral in case you fail to repay your debt.
Mortgages are some of the biggest financial transactions an individual can make in life. Due to the large amount of money involved, mortgage lenders need to ensure that they only approve borrowers with good credit. After what happened in the late 2000s, we already know how detrimental it can be to the economy when the system allows people to borrow money they can’t really afford.
With a 640 credit score, there are already many home loan options you can choose from, and here are the most common.
Type of Loan according to Minimum Credit Score
This government-backed loan insured by the U.S. Department of Agriculture doesn’t actually have a minimum credit score. However, to qualify for a loan, you must be buying property in a rural area.
With a 640 credit score, you will find yourself in a more favorable position to get approved for a USDA loan, and the application process is relatively smoother.
Mortgages insured by the Federal Housing Administration are mostly meant for first-time home buyers. But even those who have had mortgages before are still welcome to apply.
The minimum credit score required for an FHA loan is only 500, but if you have at least a 580 credit score, it’s all the better because you will be asked to make a down payment of only 3.5 percent.
If you have a credit score of 620 at least, you might be eligible for a conventional loan.
Sometimes called traditional loans, conventional loans are the complete opposite of government-backed loans. But because the federal government does not insure them, you might be asked to pay for private mortgage insurance.
When it comes to interest rates, they say that VA loans offer the best. But you can only qualify for this if you have served in the country’s military.
You will also need a credit score of at least 640 to be eligible.
Preparing for your Application
Now that you know how good (or how bad, it depends on your perspective) a 640 credit score is, it’s time to talk about how to prepare for your mortgage application.
This article focuses on credit scores, but this does not mean that credit scores are the most important factor affecting your home loan options. In fact, the most significant matter you should consider is your particular needs.
Here’s how we recommend you should go about it.
- Make a plan of how much house you actually want (or need).
- Reflect on your financial capability and current income. Ask yourself if this plan is achievable and adjust accordingly.
- Once you have decided that you want to buy a house, it’s time to find out your FICO Score from each of the three credit reporting companies. Again, you can actually find this out for free.
- Based on the credit score, try to decide what kind of mortgage will best suit your needs.
- Even if you find that your score fulfills the minimum credit score requirements of your preferred type of loan, work on improving your credit.
Increase your Credit
Why is it important to get a higher credit score if the one you already have is sufficient? The answer: lower credit scores present higher risks to lenders, and to protect themselves, they’ll want to charge you more fees.
Mortgage lenders will have the final say even when you’ve met the minimum credit score requirements of a particular loan type. So, for example, say you’re already eligible for a conventional loan with 640, but the mortgage lender might actually prefer a score of 650.
A higher credit score will give you a better interest rate, and you might be allowed to borrow a bigger loan amount. The benefits will depend on the lenders you will negotiate with.
Here are a few tips on how to improve your credit score over time.
- Always pay your bills before the deadline. If possible, submit your payment as soon as you’ve been notified of how much you need to pay.
- Take advantage of the free credit report you can avail of so you can keep track of your score and your progress.
- Scrutinize your credit report and find out if there are any errors you need to resolve.
- Lessen the amount of your unnecessary debt so you can allot more money into savings and pay lower interest.
Whether you really need an FHA loan or a USDA loan, it’s good to know that you have way more options with a 640 credit score. Just don’t rest on your laurels yet! There’s always enough room to improve, and the benefits are extremely worth it!