The Federal Housing Administration (FHA) loan is often referred to as a first-time homebuyers' loan,…
There is a good and a bad credit score range. Fortunately, a 680 FICO Score falls under the good credit score category. So, if you want to buy a house, it can put you at a great advantage so you can get a mortgage.
The kind of home loan you will get will absolutely depend on your personal needs and background. For example, if you are a service member, there’s a terrific job benefit you might want to avail yourself of. You might also be looking to move out into the country where you might feel safer and where there’s generally more space. With the COVID-19 pandemic still raging, many people have been trying hard to move out of the big cities. More than the credit score you have, circumstances such as these can dictate what mortgage you will eventually avail.
Read on below to learn more about the mortgages being offered in the market.
What Your FICO Score Means
With a 680 FICO Score, you might actually find yourself choosing between just two types of mortgages, although in reality, there are more out there you will qualify for. This is because there are home loans that are offered to help those with poor credit get homeownership, and there are also mortgages with a lot better features and benefits for those with higher credit scores. So why is this the case?
Your FICO Score is really a portrait of the kind of borrower you have been in the past. The higher your credit score, the more responsible you probably have been or the more favorable privileges you may have had, making you very attractive to mortgage lenders. They might be willing to lend you more money or charge you lower rates depending on what you might request for yourself.
Just the same, a low credit score doesn’t speak to someone’s character. Many factors affect what credit score we are rated, and many of these are actually out of our control. For example, anyone can get into an accident that makes them take out a loan they can’t really afford. In addition, some people are still saddled with student loans and other kinds of debt. Sometimes, a person’s credit score can also indicate the lack of privileges they have come from.
At the end of the day, however, what’s important to lenders is how your credit score illustrates your capacity to pay the new debt. After all, to buy a house, you’ll be borrowing a huge amount of money, so it’s a huge deal.
Later, we will discuss different types of mortgages and mention their minimum credit score requirements. As you will notice, they don’t actually require exceptional credit scores or even good FICO Scores like the one you already have. This is because they will be looking into other factors, and credit scores are just a small part of the big picture.
The Right FICO Score
Since you are applying for a mortgage, you might also want to ensure that you are using the right FICO Score. When you apply, mortgage lenders will get your credit report from the three big bureaus: Equifax, Experian, and TransUnion. All of these three companies can actually show different scores under your name. To get the credit score that they need for your application, mortgage lenders don’t get the average of your three scores. They also don’t use the highest. Instead, they use the middle value of the three.
Another thing that you have to consider is if you’re buying a house with a partner. If another person’s name is written on the mortgage, you have to know the FICO Score of the person buying the house with you. The mortgage lender will use the lower FICO Score between yours and this person for your application. And remember, for each one of you, they will be getting three credit reports to get the middle score value for your personal accounts.
Minimum Credit Score for Mortgages
This year started with some of the lowest mortgage rates we have ever seen, and this is due to the pandemic. The Fed lowered rates to boost the economy, and this has enticed a lot more people to start applying for mortgages. Add this to the fact that people are just looking for more space and are probably getting sick of the limited territory they’ve been keeping into since the pandemic started. So you might understand how hot the housing market has become.
All that said, it’s an excellent thing that the USDA loan program exists. This is a home loan guaranteed by the U.S. Department of Agriculture, and there’s no minimum FICO score required. There’s also no minimum down payment and no mortgage insurance. So the USDA loan is ideal for people who want to move into a more isolated area as they ride this pandemic out.
Because there is no particular credit score needed, though, there are many things that can disqualify potential borrowers. For example, depending on your preferred location, there are household income caps, and there is such a thing as having too much money despite needing to take out a loan. Most importantly, you have to buy a house in a rural area to get approved.
This type of mortgage aims to hit two birds with one stone by stimulating rural economies and helping disadvantaged Americans get closer to homeownership.
The housing market is an essential part of the national economy as a whole, and it’s not just about the mortgages. Think of what usually happens after someone purchases a home. After you buy a house, you will want to furnish it, and maybe you’ll work on home improvement and need all kinds of stuff. So it is necessary to keep our housing market healthy because it supports so many other industries.
To help people become homeowners, the government has this loan program that encourages first-time homebuyers to take on mortgages. The Federal Housing Administration ensures this. It is not, however, specific to first-time home buyers. Remember, what’s important to the government is that more people eventually buy homes, and to ensure this, the minimum credit score needed to apply for an FHA loan is just 500. That’s about the minimum starting FICO Score of 99% of American consumers. Only 1% of potential borrowers cannot be approved for this program, and these are really exceptional cases.
A 500 FICO Score, however, is not enough. You will need at least 10% for a down payment if your score is lower than 580. Now, if your score is 580 or higher, you can put down as little as 3.5 percent. It’s a great deal, considering how many first-time homebuyers will most likely have less than stellar credit scores.
Since you have a 680 credit score, you might actually be disinterested in this kind of offer, and we’ll tell you why. First, FHA loans charge for mortgage insurance, which is unsurprising since most people who’ll apply probably have poor credit. Mortgage insurance is also charged for other types of loans, but what makes FHA loans all the less enticing is how the mortgage insurance stays for the whole life of the loan. However cheaper the insurance rate can be, that’s nothing to sneeze at if you’ll be paying for it for 30 years.
Let’s see if the alternative will sound better for you.
So what could be the ideal loan to get with a 680 credit score? This is one of the two loan options that you may want to consider.
Conventional loans are the exact opposite of government-backed loans. For examples of government-backed, we’ve already mentioned USDA and FHA loans. Conventional loans are your more traditional mortgages, regulated by Fannie Mae and Freddie Mac, which are the institutions that set the loan limits for these home loans.
To qualify for this type, you need a credit score of at least 620. With a 680 credit score, you’re already in a better than safe range to get approved.
With a traditional mortgage, you can even put as little as 3% down, and you can apply for a higher loan amount the higher your credit score gets. What makes this type of loan a lot more preferable than FHA loans, though, is that the mortgage insurance goes away once you get at least 22% home equity. You can even skip it entirely if you have enough money for a 20% down payment.
Last but definitely not least, we have VA loans, which the Department of Veterans Affairs guarantees. Even if you already have a 680 credit score, you can still get disqualified for a VA loan if you are not a service member or eligible spouse as defined by the VA. To qualify for a VA loan, you need a minimum credit score of 640.
We still mention this loan option because this is arguably the best you can get in the current climate.
VA loans feature some of the best mortgage benefits without the usual disadvantages. You can get a house anywhere in the country, and you don’t even have to put any money down. You also don’t have to pay for mortgage insurance, although a small VA funding fee will be charged to you at closing. Finally, VA loans have some of the best interest rates in the industry, so what is there not to like?
If you are in the right profession, this is really the best mortgage option for you.
Which Home Loan to Get
No one can really look into the future. The same advantages you have at the moment may no longer be there tomorrow. Some people get mortgages even when they have the cash for full payment because it’s generally safer to keep your funds liquid. So it really depends on you and your goals.
There is also no one-size-that-fits-all approach where mortgages are concerned. Even something good for you now may not be ideal for you tomorrow, which is why many people get into refinancing or even end up selling their own homes.
As you read, you might think that traditional loans would be the best to get, which we generally would agree with, but if you are a service member or eligible spouse, a VA loan would probably be even better. Still, you might have particular circumstances we wouldn’t be aware of, so the decision will rest entirely with you. Whatever the case, take good care of your 680 credit score because it already puts you in a good place.
Safe travels on your mortgage journey!