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These days, more people get mortgages instead of paying in cash for a home purchase because, for the greater majority, home loans offer a better deal than giving up liquidity. It’s simply more convenient to slowly but surely gain home equity than wait for years until you can save up for the kind of money needed to buy real estate. When you want to take on a mortgage, the money you have in the bank becomes a secondary matter. The first thing you will have to check is your credit score.
You’ve probably heard it several times before. You need to maintain a good credit score if you want to get access to the better things in life. But this is only partially true. The good news is that no matter what credit score you have at the moment, it is more likely you’ll be able to qualify for at least one type of mortgage.
So why are credit scores so important anyway? And what kind of credit score will you need to acquire if you want to buy a $200,000 or $300,000 house? Today, we’ll try to answer these questions by guiding you through the basics of mortgages and their credit score requirements. A little knowledge can really go a long way, and in this case, save you hundreds to thousands of dollars!
It is definitely possible to go through life without needing to worry about your credit score. But whether you realize it or not, people can check for your credit background to determine several factors in your life, whether you should be given a higher insurance premium or even if you should be offered employment. Societal order is kept by these numerical values attached to our identities.
It will be to your advantage if you have a firm awareness of your FICO Score. If you didn’t know it already, you could actually request a free credit report from each of the big three credit bureaus: Equifax, Experian, and TransUnion.
If you’re getting a mortgage, this is necessary because knowing just one of your FICO Scores is really not enough. When you apply for a loan, the lender doesn’t just rely on one credit report to grasp your financial capability. Instead, they usually ask for all three of your reports so that they can compare your scores. Surprisingly, you can actually get a different rating from each of the three bureaus. Still, instead of getting the average of these three numbers, the mortgage lender gets the middle value and uses this in considering your application.
FICO Score Ranges
There are different types of credit scores, but FICO Scores are most commonly used. First, let’s look at the Fair Isaac Corporation‘s scoring model and how they define a good or a bad credit rating.
- Poor: 300 – 579
- Fair: 580 – 669
- Good: 670 – 739
- Very Good: 740 – 799
- Exceptional: 800 – 850
FICO Scores range from 300 to 850, so if you’re actually worried about getting a FICO Score of zero, you can forget about it! Your credit score is based on your recent credit history, so you either have a credit score or don’t. According to Experian, 99% of Americans actually have a score above 500.
Now that you know how credit scores are defined according to the range, you should have a good idea of how good or bad your credit score is. If you do have a bad credit score and are worried about your mortgage loan chances, it’s time to shoo those fears away because, as we’ve mentioned, you’re still likely to qualify for a loan. It’s just a matter of how much down payment will be required or how high your interest rate can become.
In the next section, we’ll discuss the different mortgage types you can try applying for once you satisfy a specific credit score level.
Minimum Credit Score for Mortgages
Every borrower has their own unique preferences and circumstances. And this is why mortgages are also tailored to meet your specific needs. The ideal home loan for one person may not be the best option for another, even if both are buying properties in the same general location.
Ideally, you should check your credit report for your credit score at least six months before starting talking to mortgage lenders. This gives you ample time to improve your rating if it doesn’t satisfy the minimum credit score requirements of your preferred mortgage type.
Below, you’ll find the minimum credit score levels you might want to aim for once you decide that it’s time to buy a house.
While a zero credit score is impossible, a 300 credit score is actually possible, although extremely rare. People can get this kind of credit score for two reasons. They can either be absolutely new to borrowing money, or they might have had a default in the recent past and have not taken any steps to remedy their situation.
The good news is, you can still actually buy a house even with a credit score of 300. But, unfortunately, you will need to purchase property in a rural area to qualify for this kind of loan.
A USDA loan is a mortgage guaranteed by the U.S. Department of Agriculture. And while you don’t have to be a farmer to apply for one, the real estate you are buying must qualify under the USDA’s eligibility map.
Borrowers with scores of 640 and above might find the application process faster and more convenient. Unfortunately, those who have scores of 639 and below will have to go through a stricter manual underwriting process to account for the reasons they got lower credit scores. Still, it can be worth explaining the circumstances that got you here if you can take advantage of the zero-down payment scheme allowed for USDA loans.
Most people will have a score of at least 500, so without any effort at all, you can already get one step closer to your dream home as long as you have money for at least a 10% down payment.
FHA loans are mortgages insured by the Federal Housing Administration, and they were created to provide equal opportunities for all regardless of borrowing experience. This is why the minimum credit score needed to qualify is just 500. Today, almost 99% of borrowers can actually apply for an FHA loan to secure their dream homes.
Once you start applying for mortgages, you’ll notice how credit scores are really bargaining chips for negotiating how much down payment you should be allowed to make and how much interest you’ll be paying for once the deal is closed. This is true for FHA loans. Remember, no matter how good low-down payment sounds, this will actually mean that you will be paying more for your house in the long run. For example, with an FHA loan, you only need a score of 580 to be allowed to make a 3.5% down payment. The funds you will use also do not have to come from your own savings; they can be sourced from a relative’s grant or a cash gift.
There are two main types of mortgages. There are government-backed loans, and there are those that private institutions guarantee. These are called conventional loans.
Although we’re putting them down under 620, it is important to understand that mortgage lenders have the final say whether you will or will not qualify for a mortgage. This is exactly the case for conventional loans.
The absolutely minimum credit score required to avail of a conventional loan is a credit score of 620, but this can vary from lender to lender. Sometimes, if you don’t meet their set minimum credit score, they can instead look at other factors like your debt-to-income ratio, your savings, or how much money you are willing to put forward as a down payment.
The general rule of thumb for a conventional loan is to pay at least a 20% down payment, although if you have a much higher score than 620, you can be allowed to pay as little as 3 percent. In addition, when you can afford to gain at least 20% home equity upfront, you can skip on private mortgage insurance, which is considered by many to be an unnecessary expense for securing a conventional loan.
Finally, one last option you might be able to consider is a mortgage insured by the Department of Veterans Affairs.
VA loans can be hard to qualify for since you need to have military experience to be considered. But the minimum FICO Score needed to buy a house under a VA loan is not that hard to achieve when you consider that a 640 credit score still falls below the good range.
These mortgages are highly sought after because, like USDA loans, VA loans will not require you to make any down payment to secure your mortgage. But the even better benefit of availing one is the highly competitive mortgage rates you can get since lenders can more confidently lend money through a loan that a big government agency guarantees.
If you can be eligible, we highly recommend getting this option when you can. It’s an opportunity you can’t pass up and a job benefit that is well-deserved.
Everyone will want to buy a house at some point in their lives. After all, it’s a big part of the American Dream. But what can dampen that fantasy for many people out there is the reality of credit score requirements that need to be satisfied to get what you want.
For the most part, credit scores are way more than just your payment history or whether you’ve maxed out your credit card. It can be affected by several factors that are just out of your control. For example, even if you’ve made it a habit to pay your bills on time, one medical emergency can set you back a long way if you end up missing a lot of payments.
So, for the record, it’s time to stop worrying about minimum credit score requirements or the average credit score needed to get approved for a home loan. As you have now learned, there are several options to choose from and even more that we haven’t gotten to discuss in this article. And if you still do want to increase your credit, you’ll get that credit score you need in your own time, especially now that you’ve taken the first step in educating yourself.
You can do it!