While many factors come into play when you are qualifying for a mortgage, your credit score is one of the most important.
Lenders are much more likely to approve your loan request if you have a great credit score and a healthy income. They will likely offer you more favorable terms, such as a better interest rate. Qualifying for a lower interest rate can save you tens of thousands of dollars over the life of your loan.
However, before you can start working toward improving your score, you must first know what credit score is needed for a home loan.
Credit Scores for Home Loans
Most lenders adhere to standard credit score limits as set by Fannie Mae and Freddie Mac.
Similar standards apply if you are refinancing your home. However, lenders will likely require a higher credit score for a home equity loan or home equity line of credit (HELOC). Keep that point in mind if you already own your home and need to use its equity to cover renovations or other major expenses.
These are typical credit score requirements for the five most common types of home loans:
Conventional Loan Credit Score
To qualify for a conventional loan, you will need a credit score of around 620 or higher. You might be able to obtain a conventional loan if your credit score is a little below the 620 mark. However, you will have to pay a higher interest rate, which can cost you quite a bit of money over the life of the loan.
FHA Loan Credit Score
The minimum credit score requirement for an FHA loan is 500. However, this is far from ideal. If your credit score is below 580, you will have to put at least 10% down. Your interest rate will be higher, and you will need to provide extensive proof of income and other supporting documents.
One of the primary benefits of FHA loans is that they are federally insured, which is why lenders will grant these loans with down payments as low as 3.5%. With a credit score below 580, you lose out on this benefit.
VA Loan Credit Score
The VA loan credit score limit is 500. As with other types of home loans, your VA loan interest rate will depend largely on your credit score; just because you meet the minimum lending requirements does not mean you will be offered ideal loan terms.
The good news is that you will still be able to access other VA loan benefits, even if your credit score barely meets the 500 thresholds. For instance, you will be able to put $0 down and will not have to pay private mortgage insurance (PMI). VA loans are only available to military veterans and active duty service members.
USDA Loan Credit Score
USDA loans help people purchase homes in designated rural areas. These loans offer several benefits that are not available through FHA or conventional loans. Specifically, they do not require PMI or money down. The interest rates are typically a bit lower than those available through conventional loans as well.
However, the USDA lending program has stringent requirements. In order to qualify for a USDA loan, you must fall under its income limits, and you have to buy a house in a designated rural area. Additionally, you will need a credit score of 620 or higher.
Jumbo Loan Credit Score
Jumbo loans are conventional loans that exceed lending limits set by the federal government. These limits are based on the average cost of homes in your area. Conforming loan limits are reevaluated every year and adjusted in response to home value increases.
Because these loans are larger and have fewer protections, the minimum credit score required for jumbo loans is higher. Generally, you must have a credit score of at least 660 to be eligible for a jumbo loan.
What Factors Go into a Credit Score?
Many different factors influence your credit score, including:
- Payment history
- Credit usage
- Length of credit history
- Number of recently opened accounts
- Types of credit
Payment history refers to your history of making debt payments on time. Frequent late payments will drag down your score, while a good repayment history will strengthen it.
Credit usage is the percentage of available credit you are using. For instance, if you have a credit card with a $10,000 limit and carry a balance of $1,000, your usage is only 10%
The length of your credit history is linked to how old your accounts are. Older accounts have a positive impact on your score. Recently opened accounts will have less impact and can even decrease your score.
The final factor that impacts your score is the types of credit that are on your report. If all you have are a few low-limit credit cards, your score will be lower than if you have a high-value auto loan that is in good standing.
How Do Lenders Determine Credit Score
Credit scores range from a low of 300 to a perfect score of 850. These scores are tracked by three entities: Equifax, TransUnion, and Experian.
When you apply for a mortgage, the lender will pull your credit report from all three credit bureaus
As an individual borrower, the middle of the three scores will be used for the loan decision.
When another person is applying for the loan with you, the average score is used to determine the score used for the loan when there is more than one borrower.
How to Improve Your Credit Score to Buy a Home
If you want to improve your credit score to buy a home, then you should:
Continue to Pay Bills on Time
Make sure that you always pay your bills on time. Making late payments can drag down your score. On the other hand, establishing a long track record of paying all bills by their due dates will help you build a high credit score.
Lower Your Credit Card Balances
Reducing your credit utilization ratio is a simple way of increasing your score. You should strive to keep all credit card balances under 30% of their limit.
Avoid New Credit Cards and Don’t Close Old Ones
Don’t apply for new credit cards, as simply filling out an application will drop your score by a few points. Also, don’t close old credit card accounts. Instead, pay them off and leave the accounts open.
Don’t Apply for New Loans
Applying for new loans, such as auto loans, will also drive down your score. Taking on a new car payment will also increase your debt-to-income ratio and make it harder to obtain a home loan.
Be Patient
Building your credit score takes time, especially if your credit report has a few blemishes. Be patient and consistently follow the tips above. Before you know it, you will have a great credit score and will be able to obtain a home loan with ease.
If you would like to learn more about mortgages or find out how close you are to realizing your dreams of homeownership, we invite you to connect with CrossCountry Mortgage. One of our experienced mortgage brokers can answer your questions and help you decide whether now is the right time to start searching for your dream home.
CrossCountry Mortgage also offers some great nontraditional loan products that are excellent for homebuyers with less-than-perfect credit. These tools might help you buy a home now while you work to rebuild your credit score. Give us a call to learn more.