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Your credit score is one of the most important factors when it comes to qualifying for a mortgage and getting a good interest rate. But the credit score needed to buy a home depends on your lender, where you want to live, and how much you need to borrow.
How mortgage lenders look at your credit score
Your mortgage lender will first review the type of loan you are applying for to determine the minimum credit score to qualify and the amount of your down payment.
Credit score minimums by loan type
Since not all loans require the same credit score, here are a few different home loan types and the credit score requirements for each.
- Conventional: For fixed rate loans, you must have at least a 620 credit score to qualify for a conventional loan. For Adjustable Rate Mortgages (ARMs), you will need at least a 640.
- Federal Housing Administration (FHA): If you have at least a 10% down payment, you can get an FHA loan if your credit score is below 580. If your score is 580 or higher, you only need a 3.5 down payment % to qualify. An FHA loan is an FHA-insured mortgage specifically designed for those with a low down payment, or fair or poor credit.
- Department of Veterans Affairs (VA): There is no minimum credit score requirement for these loans which are secured by the VA. VA loans are specifically for active duty military, veterans and their spouses.
- United States Department of Agriculture (USDA): There are two types of USDA loans: direct loans funded by the USDA and guaranteed loans supported by the USDA but funded by private banks. There is no credit score requirement for USDA loans, but you should aim to have at least a 640 credit score for direct loans.
The higher your credit score, the more likely you are to qualify for both one mortgage and another at a lower interest rate.
When there’s no money down
The higher your down payment, the more likely you are to qualify for a low-interest loan as well. If you’re putting at least 20% down and want a conventional home loan, you can avoid private mortgage insurance (PMI), an additional monthly expense to protect lenders in the event you default on your loan.
But you don’t have to put that much money. And sometimes you can even get a mortgage with no down payment at all. Just keep in mind that no down payment can also have downsides.
Without a down payment, you’ll have higher monthly payments, potentially a higher interest rate, and less chance of approval compared to someone who provides more money up front. Both VA loans and USDA loans offer financing for low or no down payment loans. Some private lenders also offer this, but this will vary by lender.
Can I get a mortgage with a bad credit score?
Although a good or even excellent credit score improves your chances of getting a home loan, it is still possible to qualify for a mortgage with a bad credit score. Here are some tips to help you qualify if your credit isn’t the best:
- Increase your down payment. The more cash you have, the less impact your credit score has on lenders.
- Reduce your debt-to-income ratio (DTI). Your DTI is the amount of your debt relative to your income. If you have a high DTI, it means you will have a harder time paying your mortgage in an emergency. The lower your DTI, the less trouble you’ll have making your payments on time, regardless of the circumstances.
- Change your expectations. A bad credit score can mean that you don’t borrow as much as you want. This means that you may have to adjust your expectations and settle for buying a house that costs a little less to qualify for the loan.
Other factors that affect mortgage qualification
Your credit score is one part of getting a mortgage, but it’s not the only part. Your lender considers many aspects of your finances, including:
- Revenue: How much you earn is a major factor. Lenders want to make sure you can afford to make payments on time each month.
- Employment history: A steady job shows lenders that you can reliably repay your home loan. Job jumping, work interruption, and self-employed people might have a harder time getting a mortgage than those who have worked for the same employer for a few years.
- Deposit: The higher your down payment, the lower your home loan will be. This means you are less risky for lenders.
- DTI: A lower DTI means lenders should have no problems making payments on your home loan.
- House cost: The higher the price of the home, the harder it can be to get the full loan amount you want with a bad credit rating.
- Derogatory marks on your credit: Derogatory marks on your credit can result from delinquency, defaults and bankruptcies. The more you have, the harder your chances of getting a mortgage can be.
How to improve your credit score to buy a house
You can try to get a home loan with a bad score now, but you risk not qualifying for a mortgage or paying more to get your dream home. You could wait a few months and improve your score instead. Here’s how:
- Repay outstanding debt. If you have old debts lying around on your credit report, or even high credit card balances, take the time to pay them off. This reduces your credit usage and also shows a positive on-time payment history to lenders.
- Keep the balances low. When using credit cards, pay them off in full at the end of the pay period. You avoid paying interest and it shows lenders that you have the cash to pay what you borrow.
- Limit new credits. It’s a good idea to limit any new lines of credit or loans you take out when considering buying a home. Opening new accounts could initially reduce your credit score and even lower your credit age. So if you need to open a new credit card, do it after you get your mortgage or months before you get one.
Where to check your score
You can usually check your credit score on any credit card issuer’s app or website, through your bank, or other institutions where you borrow money. You can check your scores for free once a year at AnnualCreditReport.com. However, the credit bureaus have allowed a free weekly check of your credit score until 2022 due to the Covid-19 pandemic.
Dispute errors on your credit report
You can contact any of the three major credit bureaus to dispute an error on your credit report, but you will need to have proof that the information on file is incorrect or does not belong to you.
The credit agency may take approximately 30 days to investigate. They will contact you and the company in question for evidence if needed. If the company or lender cannot prove that the information is correct, they must notify the three major credit bureaus so that the error can be removed from your report. You will get your results in writing, regardless of the outcome. Hopefully, this will improve your overall credit and get you ready to embark on the adventure of buying a home.
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