The different needs and circumstances of borrowers call for varied types of home loans. For…
If you intend on staying in your home for 10 years or more, it’s just cheaper to buy a house than to rent overall. But if you want to buy a house, you need to have a good credit score, especially if you don’t have the right cash to pay for this kind of purchase.
When we talk about mortgage loans, however, no one standard deal can guarantee the best terms for everyone. It will really depend on your needs, the economic climate, and your own credit profile. Still, is there a definite number you can think of as a safe bet if you want to qualify for a loan? What is a good credit score to aim for when you want to buy a house?
When you want to check up on your financial health, you don’t just need to know how much money you have in the bank. You will also want to take a look at your credit report. In here, you’ll find what’s called your credit score, which essentially measures how often you make good payments on your existing debt.
For credit scores, there are also different kinds. There’s the VantageScore, and there’s your FICO Score. The latter is the more common and most referred to by the biggest bureaus like Experian, Equifax, and TransUnion. When the lender wants to find out your credit score, they get a report from all of these three institutions, and you can actually get different FICO Scores from all of them! So when you want to know your credit standing, it’s necessary to get all your credit reports to get your credit scores.
This is important because there will come a time in your life when you can’t just rely on the money you have been saving. For example, due to an emergency or if you have to make a big purchase, you might need to borrow money, and a lot, at that. When that time comes, lenders will want to know how much cash you do have, but more than that, for them to trust you, they’ll want to see if you meet their minimum credit score requirements.
If you need to buy a house, you’ll need to take out a mortgage, and for each type of home loan out there, mortgage lenders require a minimum credit score. Let’s find out what these are.
Minimum Credit Score to Buy a House
To start, there actually is a type of mortgage where you don’t have to worry about credit score requirements. We’re talking about the USDA loan.
The U.S. Department of Agriculture ensures this, and the reason they don’t ask for a particular credit score is because they want to encourage more people to buy homes in the rural country. USDA loans can only be availed if you are buying a house in a much less populated area. You won’t even need to make a down payment as long as this address will serve as your primary residence.
Another government-backed loan that is even more popular is the FHA loan. Insured by the Federal Housing Administration, this is a mortgage loan you can get whether you’re buying suburban, in the city, or way out in the countryside.
Like USDA loans, though, you have to make sure that this will actually become your home. For example, you can’t use an FHA loan for a vacation home or an investment home.
FHA loans are very in demand because they have lower minimum credit score requirements. As a result, you can actually get approved for an FHA loan with a credit score as low as 500. Furthermore, if your credit score is 580 or higher, you will only need to prepare funds for a 3.5% down payment. And, as if all of those weren’t enough, you are even allowed to seek the help of down payment assistance programs or get cash gifts from relatives to raise your initial deposit.
The only catch of FHA loans most people will want to avoid is the required mortgage insurance. Since this type of loan caters to borrowers with lower credit scores, this presents a higher risk to mortgage lenders; ergo, insurance is required. Unfortunately, there is no way to get out of paying this insurance. You have to pay for mortgage insurance until you fully pay off your home loan.
Now, if you have a credit score of at least 620, you may be able to qualify for a traditional loan. We say it may because conventional loans supposedly do only ask for a 620 credit score, but at the end of the day, it’s really up to the mortgage lender if your application will get approved. Of course, there are still many lenders who will approve at this score range, but it’s just altogether better to prepare a higher credit score if you want to buy a home with a conventional mortgage.
There are government-backed loans like the USDA and FHA loans. Conventional loans are the exact opposite of these. Instead of the government, private institutions guarantee these loans, so naturally, investors want to be protected from risk. Like the FHA loan, conventional loans require insurance, but unlike the former, this insurance can be avoided if you can deposit at least 20% on your home. If you can’t afford 20% right off the bat, you can wait until you gain 22% home equity. At which point, insurance will automatically be discontinued.
Finally, we have mortgages that the Department of Veterans Affairs ensures. Again, this is another type of home loan insured by the federal government, but this definitely has all the best benefits compared to the other two we have discussed above.
VA loans are only applicable for our experienced service members and their eligible spouses. Still, aside from this qualification, they also need to have a credit score of at least 640 to get approved.
Once they are cleared to avail a VA loan, these are just some of the great features they can enjoy:
- zero down payment
- higher loan limits based on entitlement
- the best interest rate in the loan market
- does not require insurance
Although this type of loan does not oblige you to pay a charge that protects the lender, it asks for the VA funding fee, which starts at 2.3 percent.
The Score to Aim For
Since you’re really just getting one mortgage to pay for your house, it doesn’t really make sense to want to qualify for all the home loans out there. After all, aside from your credit score, lenders use other factors to determine if you should get approved. So focusing too much on credit scores might make you miss the mark!
Instead of thinking of mortgages in a cookie-cutter method, it would be best to focus on your own particular goals. First, you have to ask yourself the following questions:
- Where am I buying a house? (In case the location can qualify for the USDA program.)
- Who am I buying this home for? (So you can reflect on how much space you need.)
- Will I be living in this house for just 10 years, or 20, or 30?
- How much cash can I raise for a down payment?
Based on your answers to these questions, we hope that you will ascertain the best type of loan for you to target. Once you know what kind of mortgage will best suit your needs and your qualifications, it will be easier to find out whether you should or should not work to improve your credit score any further.
But okay, we recognize that you came here for answers, and you’re not leaving until you are satisfied. We get it! Applying for a mortgage is one of the most nerve-wracking situations we go through in adult life.
As you probably already noticed, we arranged our list of loan types in ascending order to show you which type of loan asks for a higher credit score. At the end of that list, we have the VA program, which requires 640, so you might say that 640 is an okay number to start. Well, yes and…no.
It’s 640, really, if you are eligible for a VA program anyway. Still, the greater majority of people who will read this probably won’t qualify for this one since it requires military service.
For your safest bet, you’ll do just fine with a 620 credit score since this will already qualify you for some conventional loans on the market. Now, if you intend to borrow a lot more money, that’s when you will want to aim for much higher, even as high as 700. Many lenders only approve you for a higher loan amount, depending on what credit score you have.
And that’s all for this article! We hope you learned a lot in our brief discussion about the different types of loans and the credit score required for each of them. It’s not easy to apply for a mortgage, especially if it is your first time. But, we hope you hang in there because if you need more help, you know just where to find us.