Why Credit Scores Are So Vital With a Home Purchase
Are you considering buying your first home? Having your financial house in order will play a significant role in your purchase. You need to have a good credit score or FICO score (Fair Isaac Corporation) to impress the bank to whom you’ve applied for the mortgage. A good credit score can help you to get the loan at an affordable interest rate.
The FICO score or credit score will play a crucial role while you’ll decide to buy a home for you. Whether or not you’re eligible for a home loan, the terms and conditions of the mortgage will be entirely dependent on your FICO score. While you may be able to get a mortgage if you have bad credit, the terms and interest rate you’ll receive will likely be less than ideal.
The credit score you need for obtaining the home loan
The credit score generally varies from 300 to 850 range. But don’t worry, you don’t have to reach the 850 credit score for obtaining the home loan. Cnbc.com reports the credit score with 760 points can help you to obtain a mortgage with a favorable interest rate.
However, who is insuring your loan and what kind of loan you are taking out creates a variation on the minimum credit score. But all the mortgage experts will agree that the FICO score or credit score around 740-760 is ideal as you can get the lowest interest rate on your mortgage. You can get your credit report to check your score free from the major credit reporting agencies one time a year for free.
The three credit reporting agencies are Equifax, Transunion, and Experian. If you know your scores are less than ideal but aren’t sure what the best way is to increase them, you might want to give a company like Credit Karma a look. Credit Karma can be a financial lifesaver with the financial information they provide.
One of the more significant and helpful things they do is provide you with the information necessary to make the right credit decisions. For example, does it make sense for you to pay down a credit card? Would that make your score increase or decrease? Many consumers make awful credit decisions based on a lack of credible data points.
Credit Karma takes away the guesswork for you. Have a look at an in-depth review of Credit Karma at Maximum Real Estate Exposure to take advantage of the full benefits and educate yourself on how the company works.
The 5 Types of home loan and the minimum credit score required
You can take a look at the 5 popular types of home loans along with the minimum credit score needed to acquire the home loans. There are also down payment requirements for purchasing a home based upon the loan program you end up choosing.
One of the smarter things you can do when buying a home is to work with a mortgage broker. A mortgage broker will be able to help you determine which of the mortgage programs below will best fit your financial circumstances.
1. Conventional Home Loan
The Conventional home loan is sponsored by federal government-backed mortgage loan agencies, Fannie Mae and Freddie Mac. The minimum credit score required to get the loan is 620.
Conventional loans have 2 sections, they are Conforming and non-Conforming loan.
The mortgage loan agencies, Fannie Mae and Freddie Mac decide the maximum limit of the loan amount for the Conforming loan.
There is no such concern of the maximum limit of the loan amount for the non-Conforming loan.
2. Jumbo Loan
Unlike the conventional home loan, the Jumbo home loan does not follow the standard set by the federal government-backed mortgage loan agencies, Fannie Mae and Freddie Mac. The Jumbo home loan can exceed the maximum loan amount set by the two mortgage loan agencies.
As the Jumbo loan is not insured by Fannie Mae and Freddie Mac, the parameter of risk for Jumbo loan is much higher than the conventional home loan.
Thus, the minimum credit score you need to obtain the home loan is 680.
3. FHA Home Loan
The FHA home loan is insured by the Federal Housing Administration. The important part of the FHA home loan is the calculation attached to the home loan.
Take a look at the FHA home loan calculation which is linked with the credit score.
- If your credit score ranges from 500 to 580, then you have to pay a 10% down payment against your FHA home loan amount.
- If your credit score ranges more than 580, then you have to pay a 3.5% down payment against your FHA home loan amount.
While taking out the FHA home loan, you have to take care of one important matter. Your mortgage lender may ask you to cover the cost of the home loan in case you default to repay the home loan amount. Most probably the lender will ask you to take out a PMI or Primary Mortgage Insurance as your down payment is less than 20%.
4. Veteran Affairs Home Loan
The US Department of Veteran Affairs ( for Military Personnel) operates the Veteran Affairs loan. Only the military personnel and their spouses are eligible for the loan.
There is no down payment and no minimum credit score is required to obtain the Veteran Affairs loan If you are in the US military service. But some lenders prefer a minimum 620 credit score for the US military personnel if they apply for the VA loan.
5. USDA Home Loan
The USDA home loan is for those who want to buy a home in the rural area and belong to a low-to-moderate income group. The USDA home loan is backed by the US Department of Agriculture.
Just like the Veteran Affairs home loan, the USDA home loan does not require any minimum credit score and down payment too.
However, most lenders require a minimum 640 credit score to obtain the USDA home loan.
These are the 5 popular types of home loans in America. Here, one point to be noted, the lenders can set their minimum credit score without taking any permission from the loan-insuring organizations. During the COVID-19 crisis, the news is, the lenders have raised the minimum limit of credit score.
The 5 Divisions of FICO credit score
In the above-written information, you have read about the minimum FICO credit score required to obtain a home loan.
Now, you can read about how FICO has categorized the credit scores from Very Poor to Exceptional range. It will help you to understand your current position.
FICO has divided the credit score among 5 ranks.
- Credit Score Below 580 – Very Poor.
- Credit Score Ranges from 580 to 669 – Fair.
- Credit Score Ranges from 670 to 739 – Good.
- Credit Score Ranges from 740 to 799 – Very Good.
- Credit Score Ranges from 800 and above – Exceptional.
If you’re eligible for the loan or not and what the terms and conditions of the mortgage will be, is entirely dependent on your FICO score.
3 Steps to improve your credit score before obtaining a home loan
After reading the 5 divisions of the FICO credit score, you are aware of it now that a ‘Good’ credit score can provide you a home loan with a favorable interest rate.
There is no big deal if your FICO score is not impressive and you want to improve your score for obtaining a home loan with a favorable interest rate.
You can follow the 3 simple steps.
- Pay your outstanding balance full and on time
Your payment history is considered the crucial factor in determining your credit score. 35% of your credit score depends on your payment history. So, try to pay your outstanding balance full or at least the minimum payment on time to improve your credit score.
- Use your available credit cautiously
If you use your available credit intelligently then you can improve your credit score. Try to use not more than 30% of your available credit.
Your credit score is also determined by how much credit you are using at a time. If you use the available credit intelligently, chances are your credit score will improve.
- Unpaid debt amount can hamper your credit score
If a credit card bill goes unpaid, you may have to pay the price of your mistake in the long term. You may have to pay a penalty like a late fee and in the long term if your unpaid debt amount goes to collection agencies then the report of unpaid debt amount will remain in your credit report for 7 years or more.
Ultimately, it will hamper your credit score. So, the better idea for you will be to go to your lender or take the expert help to solve your debt problems. As you know the importance of credit score when you will apply for the mortgage loan.
One of the unforeseen realities of taking a mortgage holiday is that is can impact your finances in a negative way.
Final Thoughts on Credit Scores When Buying a Home
According to Mr.Chris Hauber, a mortgage lender, one who wants a mortgage loan must have a credit score of 620 points. You don’t need an 800 plus credit score to get a mortgage loan but a 740 credit score is okay to get the home loan with the lowest interest rate.
About the author: The above article on the importance of credit scores when buying a house was written by Catherine Burke. Catherine is a financial writer for online payday loan consolidation. She provides information on successful cash loans and payday loan consolidation to help people get over a difficult patch. She lives in Kansas and has earned a frame in the matter of payday loans.