One of the most important factors to consider when buying a home is your credit score. Credit scores play a huge role when you are preparing to buy a house, which includes getting a home mortgage. If you have a high credit score, the chances of securing mortgages with little money down are high.
As a home buyer, you do NOT need to have a perfect credit score of 850 to get the best mortgage rates, but it would be best if you aimed to have a strong credit score to qualify for best interest rates and terms on home mortgages.
You need to know that minimum credit scores vary from lender to lender. They also vary based on who insures the mortgage and the type of home loan if you’re a first-time buyer.
Want to know the minimum credit score requirements for different mortgage loans? In this post, we’ll discuss what credit score is required to buy a house.
Why your credit score & credit reports matters
Not only will a lender check if your income and debt ratio fit their financial parameters, your credit history, score, and report will also have a big influence on what type of mortgage rate you will receive. It is simply a fact of financial life that those with the best credit histories get the best mortgage plans. In addition, those with good credit will have a much wider range of available mortgage offers, meaning a better likelihood of finding a program that most closely matches their needs.
How to optimize your credit report for a mortgage lender
In short, you’ll want to be certain that your credit report accurately and completely represents your actual credit history. This means you’ll want to have your best foot forward.
First, make certain that there are no errors in your credit report. These can always be corrected but may take a good bit of time, delaying the application or forcing you to get documentation correcting the error. Next, you’ll want to be certain that all positive accounts appear on your report. If a car loan or credit card account that you paid as agreed is missing from your report, it could negatively impact the application, especially if you have few or no other accounts.
If you do find mistakes or omissions, your first task is to contact the creditor and have them make the change with the credit bureau. It is important here to get WRITTEN verification not only of the change in the credit account but also that the creditor will be forwarding this updated information to the credit bureaus. Not only will the change be more likely to actually happen this way, but you will also have documentation to share with the mortgage lender if the question arises (and it probably will).
What factors are considered when building a credit score?
A number of components of your credit report are analyzed and “scored” and a credit score number is generated. The following factors are used to develop your score:
- Your payment history (your track record)
- Amounts owed (how much is too much?)
- Length of credit history (how established?)
- New credit (are you taking on more debt?)
- Types of credit used (Is it a “healthy” mix?)
There are no “right” scores nor “wrong” scores. Different loan programs may require different minimum credit scores, so if the scoring is not high enough for a particular program, there may be another available with lower requirements. Your scoring will only be one factor in the credit decision, along with the actual credit report itself, your employment history, your income, your debt-to-income ratios, and the appraisal of the home you want to buy.
What are the minimum credit score requirements by mortgage loan type?
The credit score needed to buy a home depends on the mortgage loan type. There are different types of mortgage loans, and each has its own minimum credit score.
Here are five types of mortgage loans
- Federal Housing Administration
- Conventional Loans
- Jumbo loans
- USDA Loans
- VA Loans
Federal Housing Administration
A Federal Housing Administration loan or FHA is a type of mortgage loan available to borrowers deemed high risk due to low credit scores. The Federal Housing Administration generally issues the loan. Created by the National Housing Act of 1934, the agency’s mission is to operate loan insurance programs and boost home construction.
As a borrower with a high credit score, you qualify to make a lower down payment as follows:
- 500 credit score requires a 10% down payment
- 580 credit score requires a 3.5% down payment
You need to know that while FHA insures loans with a 500 credit score, the lender will require that most liens and collections be paid off before closing. Also, if you apply for an FHA loan with your spouse, lenders will consider the lower of the two credit scores.
A conventional mortgage loan is a home buyer’s loan not secured or offered by a government agency such as FHA. This type of mortgage loan is generally guaranteed by a private lender such as a bank.
Is a conventional loan good? Of course, a conventional loan is a wonderful option for borrowers, especially those with little debt and a strong credit score. With a healthy credit score, you can avoid taking out primary mortgage insurance, or PMI, if you make a less than 20% down payment.
This will lower your mortgage payments. If unable to make more than 20% payment upfront, conventional loans are also available with as little as 3% down payment, under certain conditions. The minimum FICO score for first-time buyers to qualify for conventional loans is 620. You need to know that conventional loans are available as conforming or non-conforming loans.
A jumbo loan is a type of non-conforming loan that carries higher loan amounts, unlike conventional loans. They also require a higher credit score. Research shows that to qualify for jumbo loans, the credit required to purchase a home is 700 or higher.
Lenders require borrowers to have such a strong credit score because there is more risk involved with jumbo loans (requirements for such loans will be higher because jumbo and conventional loans are not protected by government insurance).
The good news is with a FICO score of 700 or higher, you qualify for best interest rates. Lenders will consider you for higher value homes that qualify for jumbo mortgage loans at this credit level.
USDA loans are primarily meant for moderate and low-income home buyers. Insured by the Department of Agriculture, these loans are for home buyers looking to buy a home vs. a house in the rural area. There is no minimum set by the government agency. But private lenders will require a credit score of 620 or higher to qualify for streamlined credit analysis.
What homes qualify for USDA loans? To know if a home qualifies for USDA loans, visit the USDA property eligibility site. Select a program and type an address to see if it qualifies.
Is a USDA loan a good idea? A USDA loan is an excellent idea for home buyers with low or moderate-income. The loan allows borrowers to buy a house with no money down.
VA loans are a mortgage loan guaranteed by the US Department of Veteran Affairs. Provided by private lenders such as mortgage companies, borrowers must have a minimum credit score of 620 to qualify. This type of loan is specifically designed for the military community and their spouses. Borrowers do not have to make a downpayment.
How do I know if I qualify for a VA Loan? To be eligible for a VA loan, you must have served 90 consecutive days of active service during wartime. Alternatively, you must have served 181 days of active service during peacetime.
How much VA loan do I qualify? At the lender’s office, a loan officer will calculate the maximum amount you can borrow. The officer will consider your gross monthly income multiplied by .41%. If your gross monthly income is $7000, your loan cannot exceed 41% of $7000 or $2870.
What are the best ways to improve a credit score?
Several factors impact your credit score. They include:
- Credit history
- Amount of debt
- Credit Utilization
- Credit age
- Length of credit history
- Payment history
- New credit
Now that you know the factors that affect your credit score, let’s look at ways to improve your credit score. Be aware, there are no quick fixes. Also, it takes time to repair a bad credit score.
Before you take any step to improve your scores, check your credit score online. By reviewing your scores online, you can learn how you look to a lender and what needs improving. Here are six ways to improve your credit score.
- Pay off your debts
- Keep your credit card balances low
- Never close unused credit cards
- Avoid applying for too much new credit
- Pay your bills on time
- Use credit monitoring to track your credit score changes
Improving your credit score is crucial, especially if you plan to apply for a home mortgage loan. The more you take control of your own credit, the higher the chances of qualifying for best interests and terms on mortgage loans. Remember, an excellent credit score opens doors for you, and being aware of your scores will fast track your dream of homeownership.
Best of luck!