This question comes up frequently with buyers. I found this article at Realty Times that offers great information to everyone who wants to better understand their creditworthiness and may be looking to purchase a home now or in the near future. I do know that the credit rating companies have changed their algorithms to include increasing debt as a negative.
What credit score do you need to get a home loan? While specifically, it can vary, there are certain things you should know before you apply for a mortgage to ensure you’ve put yourself in the best possible financial position.
Factors Impacting Your Credit Score
Before you explore specific loans, pull your credit report. You can look for errors that may need to be corrected and get a better idea of what you can do to improve it.
The factors that play a role in your credit score include:
• Payment history: This is the main factor of a credit score, making up about 35% of your score. Your payment history is simply whether you pay your bills on time or not. Any creditors you have will report your activity every month to major credit bureaus. One or two late payments probably won’t have a big impact, but a pattern of late payments will.
• Debt: The amount of debt you owe across the board makes up around 30% of your score. Debt is also called your credit utilization ratio, and it looks at how much debt you’re using versus what’s available to you.
• Credit age: Making up around 15% of your score is credit age. The longer you have accounts on your credit history the better, as long as they’re in good standing. If you have old accounts, keep them open if possible because this will affect your average credit age.
Other factors that are relevant in your score are your account mix, which is the type of credit accounts you have, and credit inquiries. Credit inquiries are pulls of your report that lenders do before extending financing.
Your credit score is important not only because it determines whether you get financing for a home, but also the interest rate you’re offered.
The following are typical ranges for credit scores:
• Anything below 580 is considered very poor• A fair score is one ranging from 580 to 669
• A good credit score might range from 670 to 739
• An excellent score is between 740 and 799
• Anything 800 and above is considered exceptional
If you’re applying for a conventional loan from a bank or a similar type of lender, you will usually need at least a 620 to qualify.
Conventional home loans follow Freddie Mac and Fannie Mae's standards.
While 620 is the minimum, having that score doesn’t mean you’ll be approved for a home loan. An excellent score is usually considered 740 and above, and with an excellent score you’ll likely not only qualify for a conventional home loan but you’ll also get a competitive interest rate and you may have a lower down payment requirement.
The U.S. Department of Veterans Affairs insures VA loans. They’re available to certain servicemembers and veterans of the U.S. Military, as well as spouses of military members who died while on active duty.
The minimum credit score for a VA loan is likely to be around 620, although this can vary, and there’s no set minimum score.
Insured by the Federal Housing Administration, FHA loans are less risky for lenders so you may find it’s easier to qualify. The minimum score for an FHA loan with a down payment of 3.5% is 580. If you’re paying at least 10% for your down payment, there’s no minimum required credit score.
If you have an FHA loan originated by a private lender, each will have its own minimum requirement for credit scores.
Other Factors Lenders Consider
Yes, your credit score determines whether your quality for a home loan and also what your interest rate will be, but other factors are relevant as well.
Lenders will look at your income to ensure that you can afford your mortgage payments if you get a loan. They’ll also look at your existing debt in comparison to your income.
The more of a down payment you can make, the more likely you’ll qualify for a lower interest rate.
Lenders also want to know if you have savings if your income ends for a period of time. You should be able to show that you have enough money saved to cover at least two months of your mortgage payments.
Finally, employment history is relevant, as well. You should show that you’ve worked in the same job or at a minimum the same industry for at least two years. The longer your steady work history, the better from the perspective of a lender.
If you have a low credit score, you could potentially still get a loan, but you’re a riskier borrower. You’ll have to offset that risk, which means you’ll have to have a larger down payment, and you’re also going to pay a higher interest rate.