As we know, credit scores are essential for getting a home loan. Various mortgage types require a different amount of minimum credit score to be able to approve your loan request.
Though regardless of your loan approval, the interest rate for monthly payment heavily depends on your credit score. For example, if you have a lower credit score, you’ll be paying more interest rate per year, as compared to if you’re on the higher end of the score range.
And for that particular reason, you not only need to know your credit score but also, you need to improve your score to get better results.
What mortgage types require what minimum credit scores
As a starter, here’s a table with minimum score requirement for various loan types:
Minimum credit score required
Federal Housing Administration with 3.5% payments
Federal Housing Administration with 10% payments
Veteran Affair mortgage
No minimum, approval is below 580
Differs by loan lender and loan programs, but unlikely less than 680
What is a Conventional mortgage?
Conventional loans are mortgages whose parameters for the loan program are set and purchased by Freddie Mac and Fannie Mae. They’re called conventional because they use PMI (Private Mortgage Insurance) rather than government loans as default. Nevertheless, PMI is only for the down payment on the equity or purchase of a refinanced home which is below 20%.
Conventional mortgages require the second-highest credit score, with a requirement of 620. Also, for the loan applications containing other high-risk factors, lenders may require a higher credit score, including high DTI (Debt-to-Income) ratio, less down payments, etc.
But the important point is the impact of your credit score on your loan’s interest rate of a conventional mortgage. This impact of your score on your loan application is verified by the data presented by myFICO.com Home Purchase Center:
From the above screenshot, notice that the higher credit score (760+) will give you a lower interest rate (2.672%) with a monthly down payment of $1,212 on a loan amount of $3 hundred thousand.
The importance of having a good credit score is prominent here. The highest credit score can easily save you $266 each month, or $3,192 annually. That’s almost over $95,760 for a 30-year long mortgage.
So, if a conventional loan seems to be suitable for you, Reali Loans is an online lender and good help for you to know what loan rate can be appropriate for you. According to them, their average customer saves around $20,000!
Continue reading below for other mortgage rates.
FHA – 3.5% deposit
FHA loans are insured by the Federal Housing Administration, which is a US government organization under the authority of HUD or Housing and Urban Development. And for them is a subject to government insurance, their credit score demands are much relaxed. Therefore, FHA loans are quite popular among people with average credit scores.
FHA loans require a minimum deposit of 3.5% with a 580 credit score requirement if you want to purchase a house.
But this doesn’t mean every lender will accept a low credit score on all mortgages. Lenders may require a minimum score of 620 if your loan application has other high-risk factors. As private lenders have freedom in underwriting the terms regardless of the operation of the loan under governmental guidelines.
FHA – 10% deposit
As the larger down payments lessen the risk factors for loans, this FHA loan type offers more credit score flexibility for larger down payments. For it to be less likely to be defaulted, FHA requires as less as 500 credit score.
That’s the only thing for the ones with bad credit. Credit score with such a piece of insulting information reflects a pattern of bankruptcy and late payments. So, if your credit score is below 500, there’s not much for you in the mortgage unless you improve it.
And so, if your profile looks too risky (like bad credit history) to lenders, they’ll reject your loan even if FHA is accepting a credit score of 500.
But remember, even if your mortgage application is accepted with a 10% deposit, the lender can still ask you to pay off your past dues, judgments, liens, or collection accounts.
Veteran Affair mortgages
Like FHA loans, VA loans are insured by the government. The Veteran Administration offer 100% funding for the purchase and refinances. In other words, no down payment if you are purchasing and no equity if you are a homeowner.
Having no particular minimum credit score demands, most lenders can still enact an in-house limit. Most lenders require a minimum of 620 scores, while some can go a little lower than 620 to 580.
As conventional mortgages don’t allow loans greater than $510,400 per single-family houses in most states of the US. But the loan limits can be greater in certain high-cost areas and also for multi-family homes.
So if you need a loan larger than the limit set in conventional loans, then that loan is termed as a Jumbo mortgage. These mortgages are offered by other lenders, like private banks, unlike conventional or FHA loans, which are insured by a government agency or Freddie Mac and Fannie Mae.
However, jumbo mortgages are highly credit-score sensitive, much more than conventional mortgages. As they adjust your APR according to your credit score, the chances of your loan being approved are heavily dependent on how good your credit score is.
For instance, a bank can ask you a credit score above 700, it can also set a requirement of 740 for higher loans like $1 million. This entails that when it comes to jumbo mortgages, no standards for credit scores are set. With greater loan amounts, these mortgages are stricter than any other mortgage types.
Therefore, you shouldn’t expect to get your jumbo mortgage being approved if your credit score is below 680. Even if you have such a score, it will be only possible if you’re a solid borrower.
Regardless of the loan type – Cost of insurance is important
Homeowners insurance is for you if you need to finance your home. The lenders that are funding you for the purchase often require it. Even though homeowner insurance is not as expensive as the mortgage, you need to consider an affordable price.
Back in the days, finding appropriate homeowners insurance used to be a burden. But now, you don’t have to call each company. You can now get the most suitable rates online, all thanks to the internet. You can try out Gabi and Policygenius for rate shopping.
Gabi is a licensed insurance broker and a free insurance evaluation tool. With the most respected and renowned insurance companies active on the platform, Gabi is useful in getting the most suitable insurance policy for the lowest rates for monthly payments.
Similarly, Policygenius works as an independent licensed insurance broker with an online platform. But they provide you with a much vast variety of insurance companies. So, you can be assured in finding the best policy for you there.
Is there any mortgage for bad credit?
Yes, you can still have an FHA mortgage (10% down payment) for bad credit. But once again, the lender will most likely ask you to pay off past dues first.
Subprime mortgages were most common as they didn’t require any type of credit score threshold, before the mortgage meltdown that happened in 2008. But since these loans were the very reason for the Meltdown, they mainly disappeared. However, there are rumours that they’re coming back. Even if they do, it will be on a limited basis.
How to improve your credit score to buy a house?
If your score is less than 680, there are a lot of ways for you to improve your credit for getting a suitable mortgage. Even improvements up to 20 or 40 points can be a huge help when you’re applying for a loan. Besides, it’s not only about getting a mortgage approval, the interest rate you need to pay heavily depends on your credit score as you’ve seen with jumbo and conventional mortgages.
So, following are the strategies to improve your credit score:
Pay every bill on time, starting from now
Pay every bill before the due date, including credit cards, loans, utility bills, rents, mortgage payments, etc. this will improve your credit score gradually.
Pay off remaining due balances
Paying off remaining dues won’t erase the negative information that it had already created, but at least, a paid due is still better than an unpaid one.
Pay off your credit card dues
The credit utilization ratio is among the biggest impact maker for your credit score, which is the division of the sum you owe on the credit card, by your credit limit. Let’s say, you owe $10,000 on your credit cards, with a credit limit being $20,000, your CUR or Credit Utilization Ratio will be 50%. What does that mean? The credit agencies prefer any ratio below 30%, so your credit score will get better as you got closer to that. However, if the ratio is 80% or above, that’s really negative and close to being the default.
Revise your credit reports in case of errors
Check and revise your credit report for errors. So, if you find any, let them know and try to get them removed.
Assess your credit carefully as you are on the way to improve it
Assess and monitor your credit to know whether it’s moving on the right track. This way, you’ll know if you’re in the correct direction, or you need to boost up the process by taking some extra steps.
Therefore, if you want to monitor your program, one good option for you to choose is the myFICO Family Plan. It’s not only a good monitor program for your credit score, but it also helps you to get your information secured from identity theft.
What’s more to it? myFICO is also a part of the association that produces credit scores, which means the original source will directly help you monitor your FICO scores. Furthermore, myFICO Family Plan offers three-bureau credit score monitoring and alerts from the three major bureaus for credit – Experian, TransUnion, and Equifax.
Last but not least, a negative credit entrance can occur on any single credit report, but it can’t appear in all three of them. So, by monitoring in all three bureaus regularly, you will know what’s exactly happening with your credit, as the way lenders see it. myFICO Family Plan is such a huge help!
As you now know that your credit score has an impact on the monthly payments and interest rate you get on your new mortgage, or even if you get any. It’s your responsibility to take whatever necessary measures to improve your credit score so that not only you get your new mortgage approval, but also you get the best possible interest rate and monthly payments.