When looking to buy a home, many will ask themselves, “what credit score do I need?” This will depend on the type of mortgage loan you’re applying for as well as the mortgage lender you work with. Even if you do not have perfect credit, or in fact, have a poor credit score, it’s still possible to get a home loan, however, those with excellent credit can qualify for more advantageous loan terms (lower interest rates, etc.).
We’ve outlined what type of credit score you will need to buy a house for different types of home loans.
What is the Minimum Credit Score to Purchase a Home?
There are many different kinds of home loans available, and each loan product will have its own minimum credit score requirements. Some mortgage lenders may also have stricter requirements in addition to a credit score that is used to determine an applicant’s creditworthiness.
Here’s what borrowers can expect based on the type of loan you’re applying for:
- Conventional loans: These types of loans are not insured by a government agency and instead conform to standards determined by the government-sponsored entities Fannie Mae and Freddie Mac. The minimum credit score for conventional loans typically is 620, although some specific loan types may require a credit score of 660 or higher.
- Jumbo loans: This is a type of non-conforming mortgage loan. Jumbo loans have loan amounts higher than conventional loans. Because there’s more risk associated with higher loan amounts, a jumbo loan may require a credit score of 700 or higher in addition to other stricter requirements (like income, assets, etc.).
- FHA loans: FHA loans are insured by the Federal Housing Administration. These loans allow for applicants with lower credit scores, making them an appealing loan product. FHA loans have a minimum credit score of 500 (with a 10% down payment) or 580 (with 3.5% down). It should also be noted that FHA loans will come with MIP (a Mortgage Insurance Premium).
- VA loans: VA loans are insured by the U.S. Department of Veterans Affairs. This type of loan is available to eligible members of the military, their spouses, and other eligible beneficiaries. VA loans do not have a minimum credit score requirement, but mortgage lenders may require that borrowers have a score of 620 or higher. One of the most notable features of a VA loan is the 0% down payment. A common misconception with VA loans is that they are for first-time homebuyers only, and that is not true. Any eligible borrower can use this loan product.
For those with stellar credit, they may have numerous loan products to choose from. However, if you have a credit score in the low to poor range, then you may have fewer options.
How Your Credit Score Affects Interest Rates
Your credit score will influence a mortgage loan’s interest rate and payment terms. This is because lenders use what is called a risk-based pricing model to determine the terms of your loan. Those with a history of on-time payments with a good credit score will be able to qualify for lower interest rates.
An individual’s credit score is not the only factor mortgage lenders use to determine your interest rate, though. Mortgage lenders will look at your debt-to-income ratio (DTI)—how much of your gross monthly income goes toward debt payments—as well as the amount you have for a down payment, investments, and available savings.
Is it Possible to Get a Mortgage With a Bad Credit Score?
While it is still possible to get a home loan with poor credit, it may not always be the best financial decision. Even a small increase in an interest rate can cost tens of thousands of dollars over the life of a loan.
For those looking to purchase a home who have poor credit, there are a few tips to consider to help ensure you can get a lower interest rate for your mortgage financing:
- Consider an FHA loan: FHA loans typically allow borrowers to qualify with lower credit scores— however, most lenders require a minimum credit score of 600. A borrower may need to increase their down payment in order to qualify for lower credit scores.
- Plan for your down payment: It’s important to have a sizable down payment as well as a good amount of cash reserves.
- Reduce debt: Consider paying down debts to reduce your DTI (like credit cards or a car loan).
- Have a co-signer: Another option is asking someone with good or exceptional credit to be a co-signer on the loan with you.
These suggestions are not a guarantee that you will be able to qualify for a home loan with good terms, however, they can help increase the likelihood.
And remember, your mortgage is not something you are stuck with permanently. As borrowers may continue to improve their credit, later on, they may have the option to refinance their existing loan into one with more advantageous terms (like removing MI (mortgage insurance) or securing a lower interest rate.
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