It’s a real shame financial literacy is not taught in a lot of American schools.
In a 2019 survey, the National Foundation for Credit Counseling found that one out of every two Americans who tried to purchase houses encountered setbacks. These include current debts, rising house prices, inadequate funds to make a down payment, and a poor credit score.
Whether you have a strong background in good financial habits, the home buying and mortgage application processes are challenging. If you are struggling to understand what credit score would best help you qualify for a mortgage, today, we hope to set you on a path with a more straightforward goal.
Although different borrowers have different needs and preferences for their mortgage, there is a safe credit score you can aim for that will ensure you buy a house this 2021.
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Good and Bad Credit Scores
Before we let you know which minimum credit score you should be maintaining, let’s have a little background on credit scoring.
It will be impossible to talk about credit without referring to the Fair Isaac Corporation’s scoring system because their credit score is the most common one used by lenders and bureaus. Of course, there are other types of credit scores, but their basis for computing credit scores and identifying credit ranges maintain the same logic that the FICO scoring model uses.
Just like the SAT, there is no such thing as a zero FICO Score. The lowest credit score you can get is 300, while the highest is 850.
As of August 2021, the average FICO score in America is 716; this is a score in between the Good to Very Good range. For reference, Good FICO Scores start at 670. This is why any credit score below 670 is usually referred to as bad credit.
You will most likely qualify for most mortgage types that you apply for with a credit score of 716. The reality, though, is this is a complex credit score to achieve for millions of Americans. Also, you don’t need to have a credit score this high to pursue your dream of owning a home.
Best Credit Score for Home Loan
On average, the highest minimum credit score that mortgage lenders ask for, regardless of the kind of mortgage you’re getting, is a 640 credit score. If you’ll notice, a 640 credit score technically falls under the category of bad credit, and this is also several points behind the average American FICO Score.
If you already have the opportunity and time to improve your credit score, we recommend shooting for a credit score of 670. Since this is already over the minimum credit score that even the most particular lenders require, it will leave you with a lot of room in case points are shaved off your score for whatever reason. We also want to promote this score because this will put your FICO Score in the Good range.
Types of Loans
We have another reason why we want to encourage you to get your credit score to this point.
To ensure that you understand the purpose of this credit score, let’s have a quick overview of the common types of mortgages you’ll encounter.
1 – USDA Loan
Details: Insured by the U.S. Department of Agriculture (USDA). There is no minimum down payment required, but there is an annual guarantee fee charged monthly, and you still have to pay the closing costs.
Qualifications: The property you want to purchase must be considered an eligible rural location by the USDA. You can check for this by logging on to this page. There is also a household income limit, so this application considers the combined income of everyone who will be living in the house. This limit varies per state.
Minimum credit score needed: No minimum is required, but a 640 credit score will get you automated underwriting. If you have a credit score under 640, you’ll have to explain to the underwriter with supporting documents what kind of circumstances gave you a lower credit score. This type of loan aims to provide this opportunity to more disadvantaged Americans to buy a house in a rural area.
2 – VA Loan
Details: Insured by the Department of Veterans Affairs (VA). There is also no minimum down payment needed. You can buy a house anywhere in the U.S. without mortgage insurance because the VA already guarantees 25% of your mortgage.
Qualifications: The borrower must be a service member on active duty or an honorably discharged veteran. There is also a minimum length of service requirement, which is discussed in detail on the VA website. Alternately, you can also apply for a VA loan if you are a surviving spouse of a veteran who perished in the line of duty as long as you have not remarried.
Minimum credit score needed: The VA has not advised lenders to pursue a particular minimum credit score. However, mortgage lenders are still free to demand their credit score requirements and other criteria for eligibility.
3 – FHA Loan
Details: Insured by the Federal Housing Administration (FHA) under the Department of Housing and Urban Development. Mortgage insurance is charged in two ways. The first is upfront, and the second is charged every month.
Qualifications: There is a minimum down payment required based on your credit score. For borrowers with credit scores from 500 to 579, you need to put down at least 10% of the home’s purchase price. If you have a credit score of at least 580, you can pay a very low 3.5% down payment.
If you can pay at least 10% of the home’s purchase price upfront, the insurance charge falls off after eleven years. If you pay lower than 10 percent, the monthly insurance stays for the life of the loan.
Although you are not allowed to source your down payment from a noncollateralized loan, you can get help from down payment assistance programs or accept gifted funds from family or friends who have a defined interest in your home purchase.
Minimum credit score needed: The minimum credit score to buy a house through FHA loans is a 500 FICO Score.
4 – Conventional Loan
Details: This is the only loan type on this list that is not government-backed. It is guaranteed entirely by a private lender. If you do not want to pay for insurance, you need to make at least a 20 percent down payment. If you cannot do this at closing, you can pay a minimum down payment of 3 percent and pay for insurance monthly until you reach 22% equity.
Qualifications: This loan can be approved for a home purchase anywhere in America. Unlike the first three loans above, you can have as many conventional loans as you want because you can use the house for any purpose, whether it be for personal, investment, or vacation reasons.
Minimum credit score needed: The lowest FICO score you can have that will still qualify you for this type of loan is a credit score of 620.
Buying a House in 2021
Now that we have given you an overview of the likeliest types of mortgage you might apply for at this time, we can explain to you why we think you should maintain a good FICO credit score (at least 670) qualify for a mortgage.
We have survived 2020, but the coronavirus pandemic is indeed still with us. Things are only slowly going back to normal, and people are just starting to resume the lives they’ve put on hold. Unfortunately, today, there’s a lot more demand for essentials with even less supply because of the critical production hours missed in 2020. One of the necessities very much in order is housing.
Housing prices didn’t just start shooting up this year. As early as last year, home prices rose at rates that haven’t been seen in fifteen years. What’s been making home buying even more expensive and even more stressful these days is the competition. To outbid other hopeful buyers, you often have to pay a lot more than the asking price, sometimes in cash.
People have now realized they don’t need to stay in the cities because they have already worked from home for most of the previous year. So now, they are motivated to seek living space elsewhere in the country, a move that’s driving a big part of the housing market.
With record-high home prices, what this means for home buyers today is that you’ll need to have higher credit to qualify for a higher loan amount.
If you have a 670 credit score, this already puts you in the Good range of FICO Scores. Of course, it will still be better if you can get it over this number because with minus just one point, you land yourself with bad credit. But if you can keep to a 670 credit score, you’ll already be a shoo-in for any of the government-backed loans we’ve mentioned, provided you satisfy other qualifications. You’ll also stand an excellent chance of scoring a conventional loan.
If the picture we are painting for you looks grim, there’s a silver lining. Currently, mortgage rates are low enough to encourage the rush to purchase houses. If you need to buy a home right now, it’s still a good time to do so as long as you pay the fair market price.
This outlook is expected to continue until at least 2022. So if you aren’t in a hurry to get a mortgage loan, you still have all of this time to check your credit and improve your score. We say this a lot, but we can never remind you enough: always pay your bills on time. And it won’t hurt if you can pay all of your other debts before you go down the mortgage road.
The best of luck!
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