If you’re looking into buying a house but your credit is poor. The first thing you need to do is check your credit score.
So what credit score is needed to buy a house? The answer is, it varies. In this article we will cover the minimum credit scores needed for different types of mortgages.
Credit Score Needed to Buy a Home FHA Credit Score Requirements
Your FICO score is the first thing a mortgage lender will check when seeing if you qualify for a loan. While there are many factors involved in qualifying for a loan, your credit score is the most important. The minimum credit score you need to purchase a home will depend on the type of home loan you qualify for.
Before the 2007-2008 housing market crash, it was much easier for people with poor credit to find subprime loans. Lenders were not as heavily regulated as they are today.
In 2010, Obama signed the Dodd-Frank Wall Street reform into law. This law tighten up the requirements in the mortgage industry and made it more difficult to qualify for a loan. Especially people with low credit scores. Typical minimum FICO scores by mortgage type: FHA Loan – 580+ credit score (500-579 score is possible but unlikely) VA Loan – 620+ credit score (some lenders require 580) USDA Loan – 640+ credit score FHA 203K Loan – 620+ credit score Conventional Loan – 620+ credit score Minimum Credit Score Required for a Mortgage Loan Many first time home buyers believe they do not qualify, however, FHA loans have low requirements.
If you have a poor credit rating the best home loan to get is an FHA loan. FHA loans have the lowest credit requirements of any mortgage, often referred to as bad credit home loans. In order for the FHA to insure a mortgage loan the borrower must have at least a 500 credit score with a 10% down payment. However, getting approved for an FHA home loan with a credit score in the 500-579 range is very difficult, even with 10% or more down.
It’s highly recommended you follow the advice in this article to improve your credit before applying for a mortgage. If you have a 580 or higher FICO score you will just need a 3.5% down payment. Getting approved for an FHA mortgage with a 580+ score is much more likely than if your score was below 580.
The first thing you need to do before applying for a mortgage loan is to check your FICO score. There are a few reputable websites that give you all three credit reports and scores absolutely free. These companies even have an app that will alert you when something on your credit profile changes.
What is an FHA loan?
FHA loans are backed by the Federal Housing Administration. The FHA does not issue the loans, they insure them in case the borrower defaults on the loan. This reduces the risk for the lender allowing them to reduce the credit score needed to buy a house. The Federal Housing Administration will back a loan if the borrower has at least a 500 credit score and a 10% down payment. However, it is very rare to get approved for an FHA loan with a credit score below 580.
Lenders look at more than just your credit score Mortgage lenders are becoming better at finding out about the borrowers ability to repay a mortgage because just seeing if you have a good credit score. One thing that will help you is if you can show that you have re-established credit and there was an economic event that caused the bad credit and you have since recovered from the financial hardship. Lenders will also look at your debt, if you don’t have much debt this is a strong compensating factor for bad credit.
Compensating factors are factors that reduce the lenders risk, allowing them to approve borrowers with low credit scores. Mortgage companies will also want to see recent solid payment history with no late payments or collection accounts in the past 12 months. A low debt-to-income ratio and solid employment history. Compensating Factors for Bad Credit Low loan-to-value ratio (High down payment 10%+) Large amount of money in savings High income Low debt-to-income ratio Long employment history with current employer Credit Score Ranges
There are three major credit reporting agencies in the U.S. TransUnion, Experian and Equifax. All three bureaus grade your credit history on a range from 350-850. Your score will be different from each credit bureau because not all creditors will report to all three companies. A 700 credit score is generally considered good by many lending institutions. Poor credit scores are generally any score below 620. Credit Score Range 500-579 = Bad credit score 580-619 = Poor credit score 620-679 = Fair credit score 680-739 = Average credit score 740 and higher = Great credit score Your credit score will affect your interest rate.
Home buyers often ask, what is a good credit score to buy a house? Well, just having a good enough score to get approved for a home loan does not mean you’re going to get a great deal. Your credit score will affect the interest rate you get. Poor credit scores often lead to higher mortgage rates and increased closing costs leading to a higher monthly payment.Obviously the higher your credit score the lower you rate will be. 579 and lower – If you are approved for a mortgage with this low of a score you will have a credit score as much as 2% higher than the current lowest rate.
580-619 – You can expect an interest rate as much as 1% higher than the lowest rates available.
620-679 – With a credit score in this range your interest rate will be slightly affected. Rates could be .5% higher than someone with great credit will receive.
680-739 – This is the range most home buyers are at, your rate will not be affected much at all in this range.
740 and higher – You will be offered the best rates mortgage companies have to offer.
Tips to increase your credit score quickly
Pay down your credit card balances Your credit utilization ratio is the percentage of credit you are using on your credit card accounts. Credit utilization ratios account for 30% of your credit score. The higher balance you have on your credit cards, the lower your credit score will be.
Make sure to pay your credit card balances as low as possible before applying for a mortgage “Pay for Delete” if you have any collections on your credit report, they are obviously having a significant negative impact on your credit score. You can contact the collection agencies directly and ask them if they will do a pay for delete. A pay for delete is an agreement that you agree to pay the balance and in return the creditor agrees to remove the account from your credit report.
If a creditor will not agree to this, there is no reason to pay off collections unless your lender tells you to. Paying collection accounts does not improve your credit score. Become an Authorized User If you have a family member or close friend with a credit card. They can add you as an authorized user on their account. The entire credit history of the account will be added to your credit report. FICO does consider authorized user accounts into their credit scoring algorithm. This is a quick way to add up to 30 points to your FICO score.
What credit score do you need to purchase a home?
FHA loans require 500 FICO score with 10% down and at least a 580 credit score with 3.5% down.
How can I get a house with low credit scores?
Depending on how bad your credit is, you just need a 580 credit score to buy a house. Credit scores between 580-620 are often considered poor, but it may be enough for you to get approved.
Do FHA home loans only come with a fixed-rate mortgage?
FHA loans come with a fixed-rate or an adjustable rate. However, the most common mortgage terms for an FHA mortgage is a 15 year or a 30 year fixed rate.
Are FHA mortgages for first-time home buyers only?
No. While they’re FHA mortgages are great for the first-time home buyer. FHA financing is available to all home buyers looking to purchase a house as their primary residence. Investment properties do not qualify. There is no limit to how many times you can get an FHA home loan. You will to sell your house if it has an FHA loan on it before you can apply for another FHA mortgage.
How can I increase my credit score so I can get a home loan?
To improve your credit score quickly you can pay the balances on your credit cards as low as possible. The lower your credit card balances are, the higher your credit score will be.
If you are ready to start the process, give us a call at 407-595-8374 so we can help get the process started.
RE/MAX Prime Properties