Career Step Up published this great post on minimum credit score to buy a house. They gave us permission to republish the article here.
What is the Minimum Credit Score You Need to Buy a House
Even the most financially aware customers may find credit ratings to be a complicated subject.
Most people know that having a good credit score increases the likelihood of being approved for a mortgage since it demonstrates to the lender that the borrower is likely to make the loan payments on time.
For this reason, many lenders have minimum credit score requirements for the loans they provide.
Read more: Reasons You Should Track Your Free Credit Score
So, what should a prospective borrower’s credit score have to be for a lender to approve a mortgage? And as for the minimum, how many people know that credit score depends on the kind of mortgage they want?
Although each lender is unique, it is essential to know where the score falls and how it affects an individual’s loan application.
What’s The Needed Minimum Credit Score to Buy a House?
A credit score is essential when buying a house because it shows the history of how that person has handled debt.
Additionally, having good credit makes the home buying process simpler and more economical – because a higher credit score implies a lower mortgage interest rate for someone who qualifies.
Read more: What is a Good Credit Score and Why Should it Matter to You
Generally, getting a house loan requires a credit score of at least 620. Most lenders set it as the minimal credit score needed for a conventional loan. That said, in some circumstances, a credit score of 500 can still qualify a borrower for a loan.
Minimum Credit Score Required By Mortgage Loan Type
The minimum credit score depends on the mortgage type the borrower is trying to obtain.
Applying for a loan through the Federal Housing Administration, often known as an FHA loan, a loan through the U.S. Department of Veterans Affairs, a VA loan, or a conventional mortgage loan from a private lender will affect the credit score differently.
1. Conventional Mortgage Loans
Home loans with conventional mortgages adhere to the guidelines established by Freddie Mac and Fannie Mae. No government organization guarantees them.
Since conventional loans demand a higher credit score than government-insured loans, they are often ideal for borrowers with excellent or exceptional credit.
Read more: Reasons Your Credit Score Dropped and How to Raise It
Additionally, conventional loans usually offer the most affordable interest rates and flexible repayment schedules, ranging from 8 to 30-year mortgage durations.
As previously stated, most lenders require a credit score of 620 or above for conventional loans.
2. FHA Loans
FHA loans are usually less risky for lenders and, as a result, easier to qualify for than conventional mortgages because the Federal Housing Administration insures them.
They provide low-equity refinances, which lets a person borrow up to 97.75% of the house’s value and down payments as low as 3.5%.
Borrowers with poor credit ratings or those who spend a sizable income on housing may benefit from FHA loans.
Read more: Simple Ways You Can Quickly Improve Your Credit Score
FHA loans may also be advantageous for current homeowners who are underwater on their mortgage and could reduce their monthly payments by refinancing.
A person must have a minimum credit score of 580 to be eligible for an FHA loan, which only requires a 3.5% down payment.
However, no minimum FICO Score is mandatory for an FHA loan approval with a minimum down payment of 10%.
However, private lenders who originate FHA loans typically have their own minimum credit score restrictions. For instance, some lenders may require a minimum FICO Score of 580 to qualify for such a loan.
A standard FHA loan requires a minimum of one credit score to qualify. The lender will consider the middle Score if it acquires all three credit scores.
Lenders will consider the lower of the two middle credit scores if a person and their spouse jointly apply for a mortgage.
3. VA Loans
A VA loan, which the U.S. Department of Veterans Affairs insures, could be prudent financial decision if the borrower meets all conditions. It is because there is absolutely no down payment needed for these loans. Borrowers with lesser credit ratings can also use them.
Meeting the eligibility standards is challenging:
- The person must be a current or former member of the U.S. Military, a veteran of the U.S. Military Reserves, or a member of the National Guard.
- These loans are also available to the spouses of military personnel who passed away while on active duty or due to a disability sustained while serving.
Private mortgage insurance is not required if using a VA loan to finance up to 100% of the home’s purchase price.
Read more: The Easiest and Quickest Ways to Raise Your Credit Score
However, there is a one-time funding cost for VA loans. The down payment, the type of loan, how many times the borrower took a VA loan previously, and the kind of military service performed all affect this cost.
For instance, if it’s the first VA loan and no down payment is made, the VA loan funding fee will be 2.3% of the loan balance.
The funding fee will be 1.4% if the borrower makes a 10% down payment on the house.
Veterans who acquire an official VA disability rating are exempt from paying the funding fee. The VA has no minimum credit requirement.
Before starting the mortgage application process, it’s important to be aware of the credit score and the factors that affect it.
The FICO Score is the most popular rating used by mortgage lenders to assess creditworthiness.
Read more: Easy Ways You Can Boost Your Credit Score Right Now
Lenders use FICO Scores to determine the interest rates and other costs associated with the mortgage.
While the FICO Score is essential in the mortgage process, lenders also consider the income, kind of property, assets, and level of debt when deciding whether to approve you for a loan.
As a result, you don’t need to have a specific credit score to be eligible.
Although each lender may employ a different exact scoring algorithm, the basic FICO Score is the starting point.
The lender calculates the credit score using various factors from the credit reports from the three major credit bureaus (Equifax, Experian and TransUnion). The range of FICO Scores is 300 to 850.
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This article was produced by Career Step Up and syndicated by Wealthy Living.
Featured image credit: Shutterstock.
