There are many misconceptions about credit scores, which is unsurprising since it’s not usually a matter you start to learn about until it has become unavoidable.
Some people dread having a credit score of 0, but this is impossible. FICO Scores, the most common credit scores used, range from 300 to 850 points. So the actual lowest score you can have is a 300, and this is very rare. Still, it is a fact that many people don’t even have credit scores, especially if they have made a conscious effort to avoid any debt.
Now that you have decided to buy a house and are hoping to get a home loan, you probably wonder which credit score is needed to qualify for a mortgage. Will a 500 be enough, or is this too low? On the other hand, do you need to have it as high as in the 800s?
Let’s calm those fears and find out!
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Why are credit scores needed?
It’s only reasonable to ask why a minimum credit score is required when you need to apply for a mortgage loan. It may feel even more unfair when you start thinking about how it is possible to close on a home loan after some manual underwriting. Is the effort to improve your credit score and maintain it in the excellent range worth it?
The answer: Yes. It is worth every ounce of effort.
To understand this better, here are just some of the ways credit scores affect your mortgage application:
1 – Lower credit means fewer options.
Credit scoring is a means to rank borrowers to show how trustworthy they are when paying back a debt. The more untrustworthy you are, i.e., the lower your credit score, the more loans you may be barred from availing of. It’s like gaining levels on a video game. As you gain more experience and skill, the more places you can unlock.
2 – Higher credit equals more house.
The better your FICO Score gets, the more money lenders might be willing to give you. You don’t have to put yourself in the lender’s shoes to realize why you can’t borrow a million dollars when you have terrible credit.
3 – Higher credit can lead to a cheaper mortgage.
The closer your credit score gets to 850, the better mortgage rates you can avail yourself of. It’s not your imagination. The way the system works, it rewards people for better behavior. An exceptional credit score shows that you have put in the work needed to pay your bills on time and live within your means.
Since you can prove that you have a good handle on your money, you can be granted a lower interest rate or overall cheaper charges.
4 – No credit involves more work.
You will have heard a story or two about people who could get mortgages without having any prior credit history. We’ve mentioned it, and this is possible through what’s called manual underwriting.
As long as you are getting a mortgage, someone will need to underwrite your loan. If you have an established record, this can be done faster and with less paperwork on your part. If you don’t have a FICO Score, on the other hand, you will have to find another way of showing the lender that you are trustworthy enough to be lent money. You’ll have to send over so much more bills and statements that will paint a solid picture of your financial health.
So, if someone will manually underwrite your mortgage, this indicates that you need somebody’s assistance. And this kind of help is seldom free! You might also need to hire a mortgage broker who will charge their commission.
Want to buy a house in 2021?
All you have to do is take a quick look at Youtube to hear about all the worrying predictions that even some famous personalities say about our current housing market situation. It’s hard to dismiss the observations they are throwing around. Home prices keep going up, up, up!
It can be very reminiscent of the housing bubble over a decade ago that most of us would still not like to remember. But there’s a logical reason why so many people are now pursuing this new journey.
The COVID-19 pandemic is not yet finished with us, and even though people may love the current homes they are living in, they can get pretty sick of it after a while if they have nowhere else to explore. Many professionals have realized and proven rightly that it is possible to do everything at home, eliminating the need to stay in cramped city studio apartments. This time around, more people want to enjoy living far from the hustle and bustle.
Regrettably, this does mean that it may not be the best time to be buying a home. It can be more prudent to wait a few more months and proceed to this significant change once 2022 rolls around. However, for many people who will read this, it may not be an option. We also do not know what can happen tomorrow.
Today, mortgage rates are still unbelievably low, so if you have the credit score needed and the money to put down on the house, it is still the time to chase your American dream.
What should my minimum credit score be?
Once you know that you need to qualify for a mortgage, the first thing you will have to do is to check your credit report. However, instead of asking if your credit score is good enough to buy a house, it’s time to find out what type of loan you need to achieve your goal.
Think of it this way. It’s like you were told that you are going on a vacation, but you have no idea where you will be going, so you pack your suitcase full for all kinds of weather. It’s just not practical! As well as how different types of outfits will mean bringing so much more on your trip, it’s also a lot of trouble that will only go to waste. It’s better to focus on a particular target, and you do this by knowing what loan type is best for you.
Reflect on the following questions and see which number will make you say yes.
1 – Do I have enough savings to make a 20% down payment?
If you answer yes, we recommend applying for conventional loans. You can borrow this mortgage from a private institution, and the federal government does not insure it. The minimum credit score required is 620 or higher.
The ideal scenario for a conventional loan is when you have money put aside to pay 20% down. This is based on the house’s purchase price. When you can spend this much money, you don’t need to be charged for private mortgage insurance, which is a lot of savings for your mortgage overall.
2 – Am I a veteran or a spouse of a veteran?
If you answer yes, you may qualify for a VA loan. This is a government-backed loan from the Department of Veterans Affairs, and it is your next best option if you don’t have the savings to put money down on a new house.
VA loans do not need you to make a down payment, and there are no set minimum credit score requirements. However, be advised that there are mortgage lenders who will have their preferences. For example, some lenders may approve you with a score of 580, yet some will not grant you a mortgage at this level. Therefore, you’ll have to do more research to find the best lender for your VA loan.
3 – Is the house I’m buying located in a rural area?
If you answer yes, you might prefer getting a USDA loan. As you may surmise, this is ensured by the U.S. Department of Agriculture. It’s a little trickier to answer this question, though, and you might want to be sure by double-checking here if your location is USDA-eligible.
Like VA loans, USDA loans don’t ask for a minimum FICO Score and oblige you to make a down payment. However, note that if your credit score is below 640, you will have to go through manual underwriting, so it’s best to prepare documentation.
4 – Did I answer NO to all three?
If you answer yes, there’s still one route you can take through a mortgage from the Federal Housing Administration.
There are many great things about FHA loans, so don’t despair if you find that it’s your only option. That’s actually why it was created. It is a safety net for first-time homebuyers or aspiring homeowners with lower credit.
The minimum credit score to buy a house with an FHA loan is just 500. That’s why it’s prevalent! Depending on your credit score, you can either make a 10% or a 3.5% down payment, and the money doesn’t have to come out of pocket. In addition, you have the option to get help from down payment assistance programs or even accept gifted funds from friends and relatives who are willing.
If you are still convinced that you want to move into a new house in the next couple of months, we hope that we can point you in the right direction regarding credit and its importance.
Before thinking of the credit score, you need to decide which type of mortgage you will get. Is it a conventional VA, USDA, or FHA loan? You don’t need to have an 800 credit score to get approved for home loans, although this kind of credit will be sweet!
In case you think you need to improve your credit score, don’t fret. At this point, this might even be a blessing in disguise! Wait a while and see if you can raise it to a score of at least 620 to try out for a conventional mortgage.
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