What credit score do I need when buying a house?
Credit scores play a pivotal part in the entire purchasing process of a house. You don't necessarily need an impressive credit score to buy a house. All you need is a score that is good enough to promise you a feasible interest rate. As in the end, it's all about waiving off the loan. This whole procedure requires you to pay attention to all minor details. This makes sure that everything goes according to the way you have committed.
There are a few obligations and compulsions to know, but you should also be equally aware of the other conditional rules. The most important thing to know is that every lender has his own sets of conditions. You may also have a minimum credit score requirement to fulfil as well. Hence, rather than focusing on achieving a perfect credit score, you should be well aware of your lender's loan type and credit requirements.
In short, no specific credit score will guarantee you a mortgage approval from the lender. Everyone has their own conditions to fulfil and obligations to follow. Since the lender has a complete right to set their credit score criteria themselves, there's no way you can question their demand. However, several types of loan have insurance from government organizations.
In this way, lenders can't just accept or take up a borrower whose credit scores do not meet the set criteria. If you have scored less than the bare minimum set by the organization.
What Are the Different Types of Home Loan?
As mentioned earlier, each loan type has its own set of criteria and requirements. The four renowned home loan types are:
• Conventional Loan
For the conventional loan type, you at least need to have a credit score of 620. If your score is above 620, you are highly likely to be selected for this. The government does not insure this loan type. However, you must meet the Fannie Mae and Freddie Mac underwriting guidelines to secure yourself a place.
The conventional loans are secured by any private company or a private lender. The down payments of these loans vary a lot. However, these loans are still quite affordable as compared to some other loans.
The conventional loans fall in two different categories: the conforming or non-conforming loans. The conforming loans follow the standards that organizations such as Fannie Mae and Freddie Mac have set. On the flip side, non-conforming loans can exceed those standards. These non-conforming loans are also known as the "Jumbo loans" that will be discussed later.
• FHA Loan
As the abbreviation says, this home loan is financed by the Federal Housing Administration. To be eligible for this home loan scheme, there are two minimum score requirements. These vary with the down payment that you choose to make.
If you wish to make a down payment of approximately 3.5%, then you must have a minimum score of 580. However, you need a relatively lower credit score of 500 if you decide that your down payments are of at least 10%.
In both of the above-described cases as well as for any case in which the down payment is lower than 20%, the lenders will make it a necessary requirement to take out primary mortgage insurance in order to cover up the cost if you default. The cost of primary mortgage insurance can vary between 0.5 and 2% of your loan amount per annum.
• VA Loan
The US Department of Veterans Affairs funds the VA loans. A VA loan is a home loan is specifically for the military community and their spouses. It doesn't require any sort of down payment. Nobody besides the military-affiliated people is eligible for this loan. Officially, this home loan type doesn't need a minimum credit score. However, various lenders put up a requirement of a minimum 620 credit score before offering the loan.
• USDA Loan
The US Department of Agriculture subsidizes the USDA loan. The USDA loan scheme is particularly for the financially unstable rural area families who wish to buy a home. Just like the VA loan type, the USDA also does not have a minimum credit requirement. However, if you have a score of 640 or more, you will get shortlisted for a smooth credit analysis.
• Jumbo Loan
A jumbo loan is a mortgage that is larger than the conforming loan limit. The minimum credit score for the selection of jumbo loan is 720. However, the more the score, the better your chances are of getting this loan. Lending such a huge amount of money is quite a big risk. Hence, the lenders don't just rely on the credit scores and look out for potential homebuyers who have solid financials. However, Fannie Mae or Freddie Mac do not officially ensure the eligibility of these loans.
Finding the Ideal Credit score to Buy a House
The aforementioned types and information only focused on the bare minimum scores and requirement every loan type has. Another important aspect of this discussion is to find the most suitable credit score to buy a house is the one that maximizes your chances of qualifying for the most feasible rate.
Credit scores ranging from 670 to 739 are satisfactory and good. If your scores lie within this range, then there are decent chances of you getting shortlisted for a mortgage. However, if you wish to achieve the most economical rates then it's better to get a higher score. A credit score ranging from 740 to 700 is good enough to secure you a low-interest loan scheme.
Furthermore, you must also keep in mind that meeting the credit score isn't the only key condition that the lender acknowledges during the entire underwriting process. At times, unemployment or unstable income pattern or resources or a high debt-to-income ratio can seem alarming to the lender and discourage them.
How Credit Scores Affect Mortgage Interest Rates?
Your total loan is greatly influenced by your credit score to buy a house. The FICO publishes data daily that reflects in what way your credit score impacts your interest rate followed by your payment.
The interest rate varies over 1.5% and you might observe a difference of 173 dollars in each payment you make monthly. These differences do not seem so concerning when viewed individually but over time they do sound alarming. The Consumer Financial Protection Bureau (CFPB) says that a house that costs $200,000 and has an interest rate of 5.25% will cost you an extra of $94,000 over the course of 30 years than a mortgage having an interest rate of 3%.
What Do You Do If You Don't Have a High Enough Credit Score to Buy A House?
In the case where you don't have a good or a high enough credit score to buy a house, you don't need to stress yourself about it. If you someone who has a better credit score than you, that person can co-sign with you in order to secure the loan.
Some experts, however, say that even if you do qualify for a mortgage plan with a bad score, it doesn't necessarily mean that you should take the chance. This is because it is quite risky as even a small increase in your interest rate might cost you tens of thousands of dollars over the length of a mortgage loan and it would become quite hard for you to pay such a large amount. However, there are a few other safe ways to get the job done.
You can also have a friend or a family member to initially purchase the house. That friend or family member can then add you to the title and then refinance the house into your name when your credit score meets the requirements. If you are unable to find someone who is willing to help you out in this regard, your best bet would be to wait and work on your credit.
How Can You Strengthen Your Credit Score Before You Buy a House?
If your credit score fails to qualify for a loan of your desired rate or otherwise any type of mortgage, it would be in your best interest to put homebuying off for a while and utilize the time to create a strong credit profile for yourself. Following are some of the ways that might be able to help you out in this regard.
- Bill Payment
Paying bills on time is a very important aspect in creating a strong credit profile as payment history greatly affects your profile. This is why it is extremely important to make the payments on time.
- Maintaining Low Credit Card Balances
When it comes to credit card balances, "the more, the merrier" doesn't apply at all. It is actually the opposite, the less you spend, the more beneficial it would be for your overall credit profile. It is recommended by the experts to not use more than 30% of the limit on any credit card that you own. Since credit utilization is the second biggest factors that affect your score, you need to be cautious in this matter.
- Checking the Credit Reports
Checking your credit reports more often would allow you to identify errors that tend to lower your credit score. Upon identification of these errors, you are advised to eliminate them as soon as possible.
- Keeping Your Credit Cards Open
If you close your credit cards, the amount of available credit that you have reduces by a significant amount which is not favourable for your credit profile. Your credit utilization goes up and hence leaves a bad impression on your credit score. It is advised to make an occasional recharge and pay it off promptly. This would be enough to keep the issuer from permanently closing your account due to inactivity.
- Have a Look at Your Credit Mix
If you only have installment loans or credit cards, you should consider adding other types as well so that it becomes easy for you to demonstrate a good payment record via diverse credit lines. If your desire is to come up with a thin credit file, you can look into getting a secured credit card or even a credit-builder loan.
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