When the time comes to buy a house, the first thing on your to-do list should be to obtain a copy of your credit report and credit score in order to get a clear picture of where you stand.
Your credit score will be a determining factor in the financing of your new home. Lenders look at your income, debt, and assets or savings when making a lending decision, but it’s your credit score that will ultimately determine whether you get approved for financing.
Lenders will look at your credit score as a measure or your creditworthiness, and your score will also determine the interest rate you’ll qualify for, which will directly affect your monthly mortgage payment. Because your mortgage will likely be the largest loan debt you incur during your lifetime and the term of the loan will be either 15 or 30 years, you’ll want to secure the lowest possible interest rate.
While you may still qualify for a loan even with a lower credit score, that score will equate to a higher interest rate and/or less favorable loan terms. Furthermore, lending requirements change with the economy. For instance, restrictions were drastically tightened after the housing market collapse of 2008 and lenders were rarely extending loans to anyone with a credit score under 720.
Let’s take a look at what qualifies as a good credit score and how different credit scores are used to determine the type of loan and rate borrowers can expect.
Credit score ranges
Most credit score algorithms — including the most commonly used FICO score, and the lesser-used VantageScore 3.0 — range from 300 to 850. The credit score average in the United States varies, but a score of 700 or above is generally considered to be good. Within the range of credit scores, there are different categories, ranging from bad to excellent:
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
These ranges offer a guideline, but each lender determines its own definition of excellent, good, fair, poor, and bad credit scores and how those are used for loan eligibility. For instance, one lender may approve applicants with credit scores of 680 or higher, while another may only approve those with scores over 720. Regardless of those definitions, borrowers will pay higher interest rates the further their scores dip below 700.
Different loans require different scores
Loan eligibility will also depend on the type of loan you’re applying for — for instance, VA loans typically require a minimum score of 620. For an FHA loan, borrowers must have a credit score of at least 580. Laxer credit requirements are based on the fact that FHA loans are designed to assist first-time home buyers by making it easier to qualify and by requiring a down payment of only 3.5 percent. While borrowers with lower scores may qualify, the down payment requirement goes up to 10 percent for borrowers with scores under 580.
USDA loans, designed for borrowers in rural areas, require a minimum credit score of 640. As an added benefit, both USDA and VA loans require zero down payment, allowing applicants to finance up to 100 percent of the price of their home.
Conventional loans, which require 20 percent down in order to avoid PMI (private mortgage insurance) usually require a credit score of 620 or higher. Jumbo loans — typically defined as any loan for more than $453,100 require a credit score of at least 700. If borrowers meet the credit score requirement, they are eligible to put only 5 percent down as opposed to the standard 20 percent.
Qualifying for a home loan with poor credit
If your credit score is lower than 580, it doesn’t necessarily mean you can’t get a loan, but it will be more challenging. Following these three tips will increase your chances of qualifying:
- Provide additional proof of credit responsibility. Particularly when your credit score is low, lenders will want to see plenty of documentation to prove that you can pay your mortgage and other bills on time, and that you are capable of saving enough money to pay down other debts. Before you begin the loan application process, you’ll want to gather the proper documentation: pay stubs, bank statements, tax returns for the past year, W2s, and investment or retirement account statements.
- Apply with a co-signer. If you are unable to qualify for a mortgage loan on your own, getting someone with good credit to co-sign can be a good option because it will significantly increase your chances of getting a home loan. It’s important to remember, however, that if you default on your loan, it will also negatively impact your co-signer’s credit.
- Repair your credit ahead of time. Of course, the best option is to clean up your credit well before you begin applying for a home loan. Working with a reputable credit repair specialist will enable you to check credit for free. Credit repair specialists can also provide you with a complete credit report evaluation and advise you on the necessary steps to improve your score. Often, loan applicants find that they can make positive strides in improving their credit faster this way than by trying to fix credit on their own, or just waiting for negative items to disappear.
Buying a home is an exciting step. Determining the credit score you need to buy a house is just as crucial as the other momentous details, such as saving for the house and deciding where to live. Even if credit issues are part of the equation, it’s important to understand that there are still options to help you secure the financing you need to make home ownership a reality. Once you have the credit worries out of the way, you can start tackling other things like unpacking and staying organized after moving, home maintenance, and home budgeting. There are so many exciting steps to look forward to after you get a handle on what credit score you need to buy a house.
This article by Best Company first appeared on Best Company and was distributed by the Personal Finance Syndication Network.
The post What Credit Score Do I Need to Buy a House? appeared first on Personal Finance Syndication Network.