Whenever you think about mortgages, you probably imagine that you need a seriously exceptional credit…
Finding out your credit score is like learning your weight on a scale. If you haven’t been diligently taking care of yourself, you probably will get scared to find out where you stand in the spectrum. However, at the end of the day, it really is best if you had a baseline on where to improve. After all, if our weight is related to our overall well-being, the same goes for credit scores and our financial health.
According to Zillow, the average age of a first-time homebuyer is thirty-four. So people will most likely already be comfortable in their careers and starting to build families at this age. But just as no one mortgage option will apply to anyone, regardless of demographic, there’s also no assurance of the kind of credit score you can get, no matter how old you are. However, a minimum credit score does exist that will allow you to get approved for any home loan you might want.
In this article, we’re going to talk all about credit scores, but most especially, that perfect spot in the range that you might want to aspire to before you start shopping around for mortgages.
Why Credit Scores Are Important
Although it is possible to get approved for a mortgage even in the absence of a credit score, not having any credit history can be one of the biggest hurdles to getting approved. Most people who will try to apply for home loans will already have some experience with debt, whether through a credit card or student loans. And through this background, they will already have a lot of data in their credit report that will generate a score.
But why do lenders rely so much on this information? And what does your credit score say about you as a borrower? To answer these questions, we will have to learn how exactly our credit scores are computed.
What’s in a Credit Score
In a nutshell, your credit score will tell a lender how trustworthy you are as a borrower.
The most common type of score used by the major credit bureaus is called the FICO Score, from the Fair Isaac Corporation that came up with the formula. This credit score can be computed according to the following components:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit accounts (10%)
- Credit variety (10%)
Clearly, your history of payments is the most important factor that determines your credit score. In this slice of the pie, you’ll be judged according to how often you can pay your duties on time. If you miss a payment in the few immediate months before you apply for any loan, this can heavily impact your score, and it will show in your credit report.
Lenders will also care about all the amounts you owe across the page. This is why you will always hear mortgage advisors cautioning you about “maxing out” your credit card or spending more than your income will allow you to pay. If there is a limit on the amount of money you can borrow in a month, as in a credit card, it is a good rule of thumb to keep your credit utilization below thirty percent.
How long you’ve kept your financial relationships also matters because the longer you keep them, the more stability this reflects on your borrowing behavior.
One red flag that lenders want to avoid is borrowers who’ve recently opened many new accounts in a short period of time. This is a sign of risk. That’s why each time a financial institution requests to see your credit report, and your score can take a hit because this means that you’ve recently applied for another account that will extend your credit lines. But, of course, if you’re the one asking to see your credit report, this is a whole different story, and it will not have any effect on your credit score.
Finally, your mix of credit accounts can reflect how much experience you have in borrowing and repaying the money. It’s not enough to keep opening new credit card accounts at different banks, and it will also be good if you can try other types of debt, as in a car installment loan. Don’t worry about this component so much, though, if it will only encourage you to borrow money needlessly. As you grow in experience, this part of your credit score will only increase over time. This is why when people buy a house through mortgages and start to make on-time payments, some people’s credit scores actually go up a few points because they now have a new type of debt added to their credit portfolio.
The Credit Score You Should Aim For
Each mortgage option on the market has its own down payment, insurance, profession, location, or credit score requirements. Depending on the mortgage type that suits your needs, you will be required to meet a minimum credit score.
Minimum Credit Score to Buy a House
This government-backed loan insured by the Federal Housing Administration is extremely popular to first-time homebuyers because this mortgage type was created with exactly this demographic in mind.
According to Experian, 99% of borrowers have at least a 500 FICO Score. With this in mind, just about almost anyone can buy a house through an FHA loan since the minimum credit score to qualify is set at 500. With a credit score of 580, you’ll also be allowed to make a meager 3.5% down payment.
If a government-backed loan cannot cover the loan amount you need, you might need to aim for a conventional loan. These mortgages are usually targeted towards those who might have more savings because you will need to make a down payment of at least 20% to skip private mortgage insurance. After all, who wants to have to pay for this additional charge?
The standard minimum credit score for conventional loans is 620, but private mortgage lenders will not approve applications bearing a credit score lower than 650.
Military service members who want to buy a house are exclusively eligible for mortgages backed by the U.S. Department of Veterans Affairs.
The VA loan is called in the industry a zero-down payment mortgage because aside from giving you some of the best interest rates in the market, you also won’t be required to make any deposit. However, serving the country is not enough to qualify. You must also have a credit score of at least 640 if you want to get approved for a VA loan.
If you are part of the tiny percentage of people who do not qualify for an FHA loan, there is still hope in availing of a USDA loan.
Typically, a credit score of 640 is preferred to get approved for a mortgage insured by the U.S. Department of Agriculture. But if you can prove the unfortunate circumstances that lowered your credit score, your application can still be considered.
Like VA loans, this type is a zero-down payment mortgage. However, for a USDA loan, the real estate you will purchase must not be located within or in the vicinity of major towns and cities. Fortunately, you do not have to work in the agriculture industry to apply.
Shoot For the Moon
As the saying goes, “Even if you miss, you’ll still land among the stars.”
It might feel like a tall order to aim for a credit score of at least 650, but according to Experian, this number actually falls within the “Fair” range. In addition, with this kind of score, you’ll already be eligible for all the mortgages insured by the federal government, as well as a lot of conventional loans that will help you afford more space.
However, it is important to remember that many of us will probably only make a mortgage decision once in our lives. Therefore, it might not be worth putting yourself through all this pressure to maintain a particular FICO score.
Since you’re already reading and researching all about mortgages, you will only really want to identify what kind of mortgage will best suit your financial needs. Once you have made this conclusion, this will already dictate the credit score needed to get approved for your application. As credit scores go, no matter how low or how high you might think your rating is, this is the only credit score that will matter for your mortgage loan application.
One of the great things about mortgages is that the choice is completely up to you. If it won’t cause you any anxiety or undue stress, there’s no reason not to go for it!
We’ll be there with you as you shoot for your moon!