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What Credit Score is Needed for a Home Loan? – See 2021 Facts Here

A luxury residence

Are you excited to go house-hunting this 2021? But, before you start talking to real estate agents or checking out homes for sale on Zillow, it’s time for a self-check. Do you know what your credit score is?

If you have no idea, that’s okay! However, we advise that you make it a point to get your credit report first to find out whether you meet the minimum credit score requirements for home loans, especially if you already know that you will need a mortgage.

Today, we’re going to share with you how you can find out the credit score that matters for a home loan and how this credit score will affect your mortgage options. We’re also going to quote you the ideal number that will most likely help you qualify for a mortgage.

It’s time to focus all of your attention!

All About Credit Scores

First off, if you’re going to buy a house, you need to answer this question: Are you purchasing one by yourself or with a partner? Because if your answer is the latter, only one credit score between the two of you will be considered.

How to get your credit score

Let’s tackle how to get your credit score. First, you can request it free from the Annual Credit Report website if you don’t know it already. Aside from this, there are many online tools that you can check out so that you don’t have to pay a cent to find out what your credit score is. Unfortunately, it’s not enough to know only one of your credit scores—because you will have three FICO Scores!

Yes, there are, in fact, three major credit reporting bureaus: Equifax, Experian, and TransUnion, and they all come up with your FICO Score according to the data that they will be able to pull on you. When you apply for a mortgage, the lenders will automatically get your information from these three companies, but they won’t get the average of the scores that will show up. It’s possible to get three different FICO Scores, and when this is the case, the mortgage lender takes the middle score and uses this one for your application. So you won’t get the benefit of the highest FICO Score they’ll find under your name.

Now, if you plan to buy a house with a partner, this means getting six credit reports in total. Once you’ve identified the critical FICO Scores under your respective names, you then need to compare to find out who has the lower credit score.

This lesser FICO Score is the one that mortgage lenders will be using.

The Ideal Credit Score Needed for a Home Loan

Target

Whether we like it or not, our credit scores will come into play when we get a mortgage. The same goes for when you apply for credit cards and car loans.

For mortgages, it’s an incredibly bigger deal because you usually need to borrow hundreds of thousands of dollars that you will pay for over a long period. It’s a necessary background check.

Each type of loan you’ll find out there will also define its minimum credit score. So, for example, we can tell you the credit score needed to buy a house according to the kind that will best fit your profile, but after this, you’ll have to find the specific mortgage loan from a company you want to get because it will also have its overlays or demands.

If all of that sounds worrying, don’t panic! Remember that because you’re getting a mortgage, this means you are a potential customer, and these lending companies will want to have you as one of theirs. However, if they don’t think that a relationship with you is a good fit for their business, there are so many other companies where you can apply.

Usually, we don’t want to advise this particular number. Mortgages are different for everybody. Some people need to buy a house in rural land, and this might mean not having to adhere to a minimum credit score, which is the case for a USDA loan. But if you want a home loan that will save you money and help you afford a better house for you and your loved ones, we recommend achieving a score of at least 640.

Why this number?

To better understand why we chose this credit score, let’s look at the minimum credit score needed to buy a house according to the type of loan.

  • USDA loan – no prescribed minimum credit score
  • VA loan – no specified minimum credit score
  • FHA loan – 500 credit score
  • Conventional loan – 620 credit score

The first three from the above list are what you government-backed loans. A particular government agency ensures each.

The last type of mortgage is your standard Fannie Mae or Freddie Mac loan. Unfortunately, the federal government does not ensure this, and it is relatively harder to qualify for one. Since conventional loans ask for the highest minimum credit score, we chose the number 640, which is already above the needed 620 credit score.

Remember, once a mortgage lender pulls your credit, this is what’s known as a hard inquiry, and this act alone will deduct points from your score. When you’re the one pulling your credit just for your information, this is what’s known as a soft inquiry, and it doesn’t affect your rating. We want to stay on the safe side on the off chance that the first lender you’ll apply with doesn’t grant you a mortgage.

There’s a second reason it’s better to have a 640 credit score. If you recall, mortgage lenders can disregard what the U.S. Department of Agriculture or the Department of Veterans Affairs says about USDA and VA loans, respectively. They’re not supposed to have a score required to approve your loan. Sadly, frequently, they still do. The same goes for FHA loans. A score of 580 falls under lousy credit, and lenders will feel more comfortable lending their money to people with higher ratings.

The Ideal Mortgage to Buy a House

With a 640 credit score, you might be thinking that it seems as if what we’re aiming for is eventually getting a conventional loan. And you are right!

According to Forbes, VA loans were 11.4% more popular last year compared with 2019. Usually, when homeowners refinance, they get a conventional loan. Still, in 2020, 241% more people opted to go with VA once they decided to get another mortgage for the house they were already paying for.

VA loans are indeed seeing their heyday. This is helped by the fact that mortgage rates have been at almost all-time lows.

Cons of VA loans

Alas, no matter how great VA loans can sound, they have their downsides.

1 – Not everyone is eligible

Soldiers

Mortgage lenders can usually be more welcoming when it comes to approving VA loans. It may not be an issue whether they prefer a credit score of 620 while you only have 580. Still, this is an exclusive job benefit for active-duty members, veterans, and their eligible spouses. The vast majority of Americans do not qualify based on these requirements.

2 – Zero down payment means a more expensive mortgage

One of the more exciting features of VA loans is that they also do not ask you to put any money down. You can choose a gorgeous house, even one that’s quite expensive, especially now that the loan limits are laxer. Then, you only have to worry about closing costs, and you can move into your brand spanking new home!

Regrettably, we do need to point out that if you don’t make a down payment, this will mean that you won’t even have a toe in the game. Instead, you’ll have to build your home equity from scratch—the lesser money you pay at first, the higher your total expenses.

Once you look back on this after 20 or so years, you may not want to thank yourself for this decision. VA loans do make more expensive houses more attainable to borrowers. What can happen, though, is that instead of people buying the homes they really can afford, they tend to overshoot and purchase a piece of property they can’t pay for long-term. That’s one thing to consider once you go house-shopping. You have to ask yourself, are you buying this house because it is the house of your dreams, or is it the actual best choice for your situation?

3 – You need to use it for a primary residence

Since the government insures this loan, it also stipulates that you can only have one mortgage of this kind at a time because you’ll be using it for your primary residence.

You can’t have two primary addresses. So, you can’t use a VA loan if you’re only planning to use this house as a vacation home or if you’re hoping to make use of it as an investment through rentals.

4 – You have to pay a VA funding fee

Something you have to understand about home loans is there’s such a thing as insurance for your mortgage.

One seeming benefit of VA loans is you don’t have to pay for any mortgage insurance…but there is a funding fee that they will charge to you at closing, which is their way of saying that you have to pay for this opportunity. The good news is, you can roll this funding fee over to your loan, but honestly, why would you want to do this?

The funding fee will not add anything to your home equity, so why include it in the amount you’re borrowing? It will only start costing you more in interest!

Shoot for Conventional

 

Plan

In conclusion, if you want to get a mortgage, make it your target to get a conventional loan; aim for a credit score of at least 640. Regardless if you’re buying a house in a rural location. Regardless if you’re a veteran. Conventional loans offer the best deal!

It is a misconception that if you have a conventional loan, you need to have at least 20% of the home’s purchase price as a down payment. The minimum amount you have to prepare is just 3 percent. They often quote this 20% because it is needed to avoid private mortgage insurance (PMI). And, as we’ve mentioned, the lesser down payment you make, the more you’ll owe. If you can’t afford this, you can still get the loan, and then once you already have 22% home equity, they’ll stop charging you for PMI monthly.

If you get a conventional mortgage, you can also use your house for any purpose you want. You can even have as many traditional loans as your income will allow you.

We highly encourage you to do the math and know for yourself.

 

Photos by Pixabay

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