The Federal Housing Administration (FHA) loan is often referred to as a first-time homebuyers' loan,…
When you have a credit score of 650, there’s really not much left to go to get to the Good FICO Score range.
If you didn’t know this yet, though, we have great news for you because, as far as home loans are concerned, you don’t need to maintain a good credit score if you want to qualify for a mortgage. However, credit scores will still be important when determining what terms you will get for your loan. For example, you might need to make a bigger down payment or pay a higher interest rate. The type of mortgage you’ll get with the credit score you have will dictate how much you’ll be paying in the future.
Today, let’s talk all about credit score requirements so you can have a better idea of what to expect at this point in your life. It’s 2021! And the housing market is one of the toughest places to find yourself in at the moment. So you’re going to need all the help you can get!
Is a 650 credit score a bad FICO score to have?
Oftentimes, you will hear the phrase bad credit thrown around when it comes to loan applications or similar matters. But we need to discuss just what bad credit really means to understand your FICO Score a little bit better.
To start, this is how the Fair Isaac Corporation classifies credit score ranges:
- 300 to 579 is Poor
- 580 to 669 is Fair
- 670 to 739 is Good
- 740 to 799 is Very Good
- 800 to 850 is Exceptional
Because FICO Scores start at 300, this is the absolute lowest your FICO Score can go. So strictly speaking, a zero FICO Score is not at all possible. And the individuals who do get a FICO Score like 300 are really few and far between. As a matter of fact, only 1% of people will have a FICO score lower than 500, so you’ll know that it really takes extraordinary circumstances for your score to fall down this low.
A 650 credit score really only rests in the Fair range, but it is still nothing that you should be wringing your hands for. Even with a Fair FICO Score, and especially at the 650 marks, you’d still be likely to get approved for many home loans you will find.
All that said, it’s still important for us to put this disclaimer. There’s no cookie-cutter mortgage option that would be able to serve everyone because each person has their own needs, and mortgages have their own requirements and features—the final decision of whether you’ll qualify or not will always be up to the mortgage lender. If you don’t get approved by one lender, though, you can always visit their competition!
Options for Home Loan with 650 Credit Score
A 650 credit score is already actually good enough for most loan types, so by listing these kinds of mortgages below, we won’t really be skipping on any!
Although it is often referred to as a rural housing loan, you don’t necessarily have to buy a house in the middle of nowhere to qualify for a USDA loan. This kind of mortgage insured by the U.S. Department of Agriculture actually has its own definition of rural, and you never really know if you will qualify for it unless you enter your details on this page.
There are two ways the USDA loan can promote real estate purchase in less populated areas. First, they don’t require a particular minimum credit score. Second, if you have lower credit, they’ll ask you to explain your circumstances. Maybe you ran into medical debt or missed a couple of bills during the pandemic. As long as you can exhibit the ability to pay this new debt despite bad credit, you’ll still have the chance of getting approved.
Another reason is, the USDA loan requires zero down payment, although you will still have to pay for closing costs and the usual charges. Nevertheless, it’s a great choice for low-to-middle income families, especially now that more Americans hope to escape the cities while the country weathers the COVID-19 pandemic.
When your credit score is already at 650, there’s really not much reason for you to go for a Federal Housing Administration loan. But it’s the most popular loan out there, and it would be amiss not to mention it.
FHA loans are meant more for first-time homebuyers, which is why the minimum credit score needed to qualify for it is just a 500 credit score. Now, FHA loans are not really so bad when you think of them as stepping stones for more traditional loans because once you add a mortgage to your credit history, you’ll actually improve your credit score slowly. But if you do get an FHA loan and manage to retain it for the whole original loan term, that’s when you know you overspent for your mortgage.
What really makes FHA loans unlikable is that you have to pay for mortgage insurance for the whole life of the loan. You have to pay an insurance fee upfront at closing, and then there are also monthly insurance payments.
Since you are already overqualified for an FHA loan with a credit score of 650, we would recommend you get a traditional loan, or what’s known as a conventional loan. This one is privately guaranteed, unlike USDA or FHA loans. Like FHA loans, though, you have to pay for mortgage insurance. The good news is, you can have the opportunity to skip out on paying insurance if you’re able to put in as much as a 20% down payment. However, if you don’t have this much cash on hand, you’ll have to wait until you gain 22% home equity (while making monthly payments) because once you do so, insurance is removed.
Conventional mortgages might also be more your style if you plan to buy a house that’s a little more on the expensive side. These loans have to conform to limits set by Fannie Mae and Freddie Mac. Typically, you should be able to qualify for them as long as you have a credit score of 620, which is why at 650, you’ll likely get approved for a lot of conventional loans out there. However, there can be conventional mortgages that do not conform to Fannie Mae and Freddie Mac. You can even get conventional for million-dollar loans, but for these cases, there will be lots more overlays, and you’ll want to have a score of at least 700 before you apply.
If you have already been able to serve in the country’s military, you can also qualify for a mortgage guaranteed by the Department of Veterans Affairs. This is actually one of the most powerful loans you can get at the moment because there are just so many great benefits to enjoy.
Similar to a USDA loan, you don’t have to make any down payment for this loan type. But what makes this better than USDA is you can choose any county, any city in the country you like. There are no location limits. You also don’t have to pay the usual insurance for this as you might with an FHA or conventional mortgage, but there will still be a minimal VA funding fee which usually starts at 2.3% of your total loan amount.
Recently passed legislation also removed previously set loan limits for VA loans (these vary according to your location), making them more popular starting in 2020, when this new law kicked in. Now, you can even borrow up to a million dollars using a VA loan.
The requirements for VA loans are also a lot looser compared to other types of mortgages, so even if you have bad credit, there might still be mortgage lenders willing to approve your application. If you want to stay on the safe side, though, a 640 credit score will usually be enough.
Should I still aim for a higher credit score?
Now that you have read about the different types of mortgages and their credit requirements, it’s time to ask yourself your particular needs and preferences for the kind of mortgage you want to get.
- Are you looking for a mortgage you’ll stick with forever, or will you be open to get refinancing when there are better rates in the future?
- How long do you plan on staying in your new home?
- How much down payment are you willing to make or capable of paying?
- Are you buying a house in a rural area?
Keep in mind that the lower the down payment you make, the more expensive your loan becomes. It may seem easier on the pocket now to settle for lesser home equity, but your future self will definitely not thank you for it.
Based on what you decide, though, this is only when you’ll be able to tell for yourself if you’ll need a higher credit score. In general, it’s always a good idea to work on your credit, especially if you’re planning to get a mortgage, but if you already have it in the bag, it’s probably just a way of gaining undue stress and anxiety.
The more expensive the home you’re trying to buy, the closer to 700 you’ll want to get your score. Beyond this number, though, it won’t really matter as much because as long as you don’t have a very poor credit score, lenders will most likely end up loving you.
Am I looking at the right credit scores?
Finally, you want to make sure that you are actually referring to the correct credit score that lenders will use.
There are really many types of credit scores. But the most common, and the only one you’ll want to watch out for, is your FICO Score. Surprisingly, you might actually get three different ones from each of the three major credit bureaus: Equifax, Experian, and TransUnion.
Once you apply for a mortgage, mortgage lenders will ask all three of those institutions for your credit report. Now, if two of your scores turn out to be the same value, lenders will use that particular number, regardless of the third. But if all three numbers are different, they use the middle value among your scores—not the average.
It’s not enough to get your credit report from one company. Please make sure you get your free credit report from all of them.
We hope we were able to enlighten your mortgage concerns in this brief article.
Safe travels on your mortgage adventure!