Applying for a mortgage can be an anxiety-ridden time-consuming process, so it can help a lot if you can get a good idea beforehand, whether you even have a shot. The best way to do this is by finding out your credit score from your credit report and the minimum credit score for the type of mortgage that you want. However, this is also just the first step of a completely different process.
If you have always taken care of your finances, chances are you’ll find your credit score at least good enough to qualify for a mortgage. But if you’ve been through some rough patches, especially recently, you might discover that your credit score doesn’t cut. If this is the case, you will want to bring it up right where you want it to be before you start shopping around for mortgages.
So, how good exactly is good credit? If you are curious to find out if your credit score is on the higher or lower end, you’re going to find out today. In this article, we will talk a bit about home loans and their credit score requirements.
Don’t worry if you’re dipping your toes in here for the first time. The water’s fine, and we know you’ll do just swimmingly!
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There are three major credit reporting companies that different mortgage lenders use to look into your financial background. There’s Experian, Equifax, and TransUnion. If you want to find out whether you qualify for a mortgage, it’s not enough to look at your credit report from just one of these companies.
How to Get Your Credit Score
When you apply for a loan, banks will request your credit report from each of the three mentioned credit bureaus. Don’t be surprised if the number Equifax comes up with ends up different from Experian’s or TransUnion’s. When you do get varying scores from each, lenders will then pick the middle number—not the average—and this is the score they’ll refer to when they look over your application. So you see, if you only consult one company, you won’t really be seeing the bigger picture. On the other hand, you check your credit to get an idea of how much to improve, and you don’t really want to miss the mark.
Today, there are already many resources, especially online, where you can get free assistance for getting your credit report. If you encounter anyone or any site that asks you to pay a fee, run away and fast or close that browser! Because you absolutely don’t have to pay a penny. You can even check this page from the Federal Trade Commission website if you need proof that you are entitled to one free credit report per year.
Whether you are disappointed or not with the score you get, it’s important to know where you stand so that you can plan and prepare accordingly before you even buy a house.
Different Credit Score Requirements
One more thing you need to know about credit scores and mortgage loans is that while a type of loan can require a minimum credit score, this an altogether different condition compared to the credit score requirements that you will get from different mortgage lenders.
For example, below, you’ll find out the absolute lowest your credit score is allowed to qualify for a conventional loan; however, when you apply with one lender, you’ll find out that you don’t qualify for their loan. Furthermore, while one lender can reject you, you might still get approved through another lender. So don’t go losing hope! The right mortgage loan is waiting out there for you.
From one borrower to another, it’s a good thing to always keep in mind that your credit score is not a measure of who you are as a person.
A lot of people can get turned away several times before arriving at where they need to be. When you fail one too many than you can stand, it can be easy to blame yourself—and your credit score–for your failure. This is not true, and you haven’t hit rock bottom just yet! Your credit score is really just a number that shows how often you’ve been able to pay enough and on time with your other debts in the recent past. There are several ways you can improve your credit that you might even see results in as fast as a couple of months, so it’s no reason to beat yourself up.
Just for reference, the credit scores we’ll be referring to moving forward are FICO Scores. This is the kind of credit score that different credit reporting companies most often use.
If you’ve heard people talk about a zero credit score, there’s just no such thing. FICO Scores fall from the range of 300 to 850, so even if you absolutely have no credit background, to begin with, you won’t actually have a 0 score.
Below, you’ll find the range of scores and how FICO defines them.
FICO Score Range
300 – 579 : Poor
580 – 669 : Fair
670 – 739 : Good
740 – 799 : Very Good
800 – 850 : Exceptional
Types of Mortgage Loans
Now that we’ve talked about credit scores, it’s time to learn about different mortgage types because the credit score needed to buy a house does depend on what kind of home loan you’ll be getting.
FHA loans are mortgages insured by the Federal Housing Administration. You’ve probably heard of these because they are usually preferred by first-time homebuyers or those with low to moderate-income.
The rating marketed to qualify for an FHA loan is usually set at a credit score of 580, but that’s just if you only have enough money for a 3.5% down payment. If your credit score falls from 500-579 (as mentioned previously) in the poor range, you can still get approved for an FHA loan as long you have available funds for a 10% down payment.
This mortgage loan program is an important assurance from the government that you can get a fair shot at affording your dream home, as, according to Experian, 99% of people have credit scores of at least 500.
When you’re borrowing money to buy a house, it’s important to understand that depending on what type of loan you’ll be getting, the amount of money you’ll be allowed to borrow will be based on your income. This only makes sense because the wider the gap between the amount of money you borrowed and the amount of money you earn, the higher the possibility that you won’t make on-time payments.
If you find that you need more houses and government-backed loans can’t provide what you’re after, you can then go for a conventional loan. The loan limits for these mortgages are set by Fannie Mae and Freddie Mac, and the values do change annually. But you’ll definitely see that with the right credit score, you’ll be amply able to afford more space through an approved conventional mortgage.
For conventional loans, you’ll need a minimum credit score of 620, but as we’ve mentioned before, you might see that different mortgage lenders can ask for higher credit requirements.
The U.S. Department of Veterans Affairs ensures this loan type, and as expected, only military members (and their spouses) are allowed to avail of this type of mortgage. And that’s a good thing because the benefits that come with VA loans are hard-earned by our country’s service members.
Mortgage lenders can more confidently approve VA loans with lower interest rates since government agencies back these. And qualified borrowers can take advantage of the zero down payment required to move into their dream home.
The minimum credit score required to buy a house through a VA loan is 640.
Since there is still that percentage of borrowers who might not qualify for an FHA loan, another good option is USDA loans.
You might hear that to get a mortgage insured by the U.S. Department of Agriculture, and you will need a minimum credit score of 640 or higher. But this is not truly the case. As long as you are a U.S. citizen and purchasing property in a rural area, you can take a chance on this mortgage application.
The 640 FICO Score often mentioned is just for a smoother application experience because if you have this credit score at least, they’ll be able to pull up your credit history much faster. For lower credit scores, potential borrowers need to present documentation or proof that extraordinary circumstances gave them unsatisfactory FICO Scores. For example, maybe you got sick and had to pay medical bills, which is something no one can really blame you for.
So there you have it.
Buying a house in America can be complicated, that you might rather not think about it, but it’s definitely doable no matter what credit score you have.
If you don’t believe it, you might be shocked to know that even people who do not have a credit score can still apply for a mortgage. Some lenders do allow this, but you will have to go through a rather grueling manual underwriting process. It’s worth it, however, as long as it takes you up to the final step towards your goal.
Mortgages have been around since forever, it seems. And sooner or later, you might have to go through this process yourself. But, remember that millions of people have been where you are, and there will be lots of helpful advice from experienced borrowers as you go on your journey— don’t be afraid to ask! Cheers!