Consumers, even those who are financially savvy, can find credit scores confusing. The majority of people are aware that a good credit score makes it easier to qualify for a mortgage since it indicates to lenders that you will repay your loan on time. Are you aware of the minimum credit score required to buy a house and qualify for a mortgage? And did you know that the minimum varies depending on how you want the mortgage to be structured? Among the most common credit scores used by mortgage lenders to determine creditworthiness is the FICO® Score (developed by Fair Isaac). With the help of FICO® scores, lenders determine what kind of mortgage you will be approved for. Apart from a good credit score to buy a home, there are a lot of other things that are taken into consideration.
We will discuss the other factors later, but first let’s know the minimum credit score you need to maintain to qualify for a loan.
What’s a good credit score for buying?
In general, you’ll need a credit score of at least 620 in order to secure a loan for a house purchase. Typically, conventional loans require a score of 620. Despite this, it is still possible to qualify for a loan with a lower credit score, including those in the 500s. Get to know about different credit requirements for different loan schemes.
VA Credit Score Requirements
A VA loan does not require a minimum credit score, but most mortgage lenders require a credit score of at least 620 FICO. Borrowers often face additional scrutiny and lender requirements, even if some lenders go lower.
Comparing VA Loan Requirements to Other Loans
There is a range of 300-850 on the FICO credit score. FICO no longer publishes the median nationwide score, but the national average FICO score was 716 as of April 2021. With this in mind, a 640 minimum is fairly borrower-friendly. The score is not easy to achieve, but when compared to other options, it is an accommodating benchmark.
The conventional loan:
Conventional loans are not backed by the government. Conventional loans are harder to obtain without government guarantees because lenders are at greater risk. A large down payment and a high credit score are usually required to secure conventional financing.
In the conventional lending market, a credit score below 740 is likely to bring on added scrutiny and significant fees, said John Councilman, president of The National Association of Mortgage Brokers.
FICO scores for conventional borrowers are therefore impressive. FICO credit scores for successful conventional loan recipients in June 2021 averaged 755 points, according to mortgage software provider Ellie Mae.
The federal government backs FHA loans, just as it does VA loans. Depending on the minimum FHA credit score requirements, lenders can accept credit scores as low as 500 with a 10 percent down payment and 580 with a 3.5 percent down payment. The minimum credit score is generally higher.
Several lenders are requiring a minimum credit score of 640 for FHA loans following the global pandemic, similar to what is required for VA loans.
As of June 2021, the average credit score for FHA loans landed at 670, compared to 665 in October of 2019.
In addition to credit, FHA loans require a minimum of 3.5 percent down payment, an up-front mortgage insurance premium, and a mortgage insurance premium that runs for the life of the loan.
In addition to government-backed loans, USDA loans are also available, but only in rural areas. As with other government-backed options, most USDA lenders look for a credit score in the mid-600s, but USDA does not enforce a minimum credit score.
How Does a Credit Score Work?
Before you begin the mortgage process, you should know your credit score and how it affects you. When you understand this information, you can start improving your credit score or maintaining it so that you can increase your chances of being approved for a mortgage.
Depending on the lender, some variation of the standard FICO® Score may be used as a base. The three major credit bureaus (Equifax®, ExperianTM and TransUnion®) provide different variables on your credit report to FICO® in order to compute your credit score. A FICO® score ranges between 300 and 850.
In addition to the above, what else do mortgage lenders consider?
If you want to get a mortgage, your credit score is important. However, it’s not the only factor lenders consider.
Your income is also taken into account by lenders. You need to earn enough money each month to afford your payments.
Lenders also consider your monthly debts when evaluating debt-to-income ratios. Most lenders ask that your total monthly debts, including your estimated new mortgage payment, do not exceed 43 percent of your gross monthly income. You might find it difficult to qualify for a mortgage if your debt-to-income ratio is high.
An increased down payment will increase your chances of qualifying for a mortgage with a lower interest rate. If you already invested a significant amount of money into your loan, lenders think you are less likely to stop making payments. Lenders consider loans with larger down payments as less risky.
If your income is unexpectedly cut off, lenders want to make sure you have the funds to pay your mortgage. As a result, most lenders will want to see that you have enough savings to cover at least two months of mortgage payments.
History of employment: Lenders vary, but they usually prefer to see that you’ve worked for the same company or industry for at least 2 years. If you’ve built up a lengthy work history, you’re less likely to lose that job and that income stream.
Contact us to know more about the credit score requirements for each of the home loan schemes. We can help you get the right guidance as you apply for a home loan with us. You can anytime contact us to know more about our mortgage services.