CREDIT SCORE NEEDED TO BUY A HOME
By Pierre Mouchette | Bits-n-Pieces
Can You Get A Home Loan With Bad Credit?
Getting a home loan with bad credit and an FHA loan is possible. They require a 500-579 credit score if you have 10% to put down and a 580 minimum credit score with just 3.5% down. Currently, with the economy struggling due to covid, FHA lenders are not providing loans to borrowers with credit scores below 580. Even with a 580 to 620 credit score, you will need compensating factors to compensate for your score.
Minimum Credit Score Requirement by Loan Type
Your credit score is the most crucial factor in determining your qualifications for a loan. The credit score you need to get a mortgage will depend on the lender, your down payment, and the type of mortgage you request.
FHA Loan: 500-580
VA Loan: 580
USDA Loan: 620
HomeReady / Home Possible Loan: 620
Conventional Loan: 620
FHA 203k Rehab Loan: 640
Conventional 97 Loan: 680
Piggyback Loan: 680
FHA Loans - Are guaranteed by the Federal Housing Administration and issued by private lenders. You need a 580 credit score to buy a house using an FHA loan. A 10% down payment is required for borrowers with at least a 500 score.
VA Loans - Veterans of the military are eligible for VA loans. The Department of Veterans Affairs does not do not have a minimum credit score requirement to guarantee a loan. Lenders use their specific credit requirements. The minimum credit score most VA lenders require is between 580 and 620.
USDA Loans - These are for low-to-median income borrowers who plan on buying a home in USDA-eligible rural areas. They are guaranteed by the US Department of Agriculture and offer 100% financing. They have income limits, and your income cannot exceed 115% of the area median income (AMI). You need a 620 credit score to be eligible.
FHA Section 203k Loans - If you want to buy a home that needs repairs, you can get a loan for purchasing the home plus the cost of making repairs with a section 203k loan. They require a 620 credit score and a 3.5% down payment.
Conventional loans - are not guaranteed by the government but by private mortgage insurance companies. They require a 620 credit score and a down payment between 5% to 20%. If you plan on putting at least 20% down, you will not need to carry mortgage insurance.
Home Possible / HomeReady Loans - Fannie Mae and Freddie Mac created these low-down-payment home loan programs for low-income first-time homebuyers. Eligibility for the mortgage programs requires your income to be below 100% of the area median income. They also require a 3% down payment with a minimum 620 credit score.
Conventional 97 Loans - A conventional 97% LTV loan finances 97% of the purchase price of a home. There are no income limits. A 680 credit score is required.
Jumbo Loans - For a loan that exceeds the conforming loan limit. You will need a jumbo loan. Because of the high loan amount, Jumbo loans present more risk to lenders and require at least a 700 credit score with a 10% to 20% down payment.
Compensating Factors for Poor Credit
If you have bad credit, the rest of your mortgage application needs to compensate for it with a low debt-to-income ratio or large down payment. Lenders call these compensating factors things that offset having poor credit. They reduce the lender’s risk, allowing them to approve borrowers with low credit scores.
How Your Credit Score is Calculated
Payment History (35%) - Payment history is how well you pay your bills on time. It includes late payments and collection accounts.
Credit Utilization (30%) - The amount of available credit you use is called your credit utilization ratio. Try to keep your credit utilization ratio below 25%.
Length of Credit (15%) - The longer your accounts stay open, the better your score will be. Don't close credit cards is possible.
Types of Credit (10%) - A mix of credit accounts such as credit cards, auto loans, and mortgages will help improve your credit score.
Credit Inquiries & New Accounts (10%) - When a lender pulls your credit, it creates a hard inquiry. Multiple inquiries hurt your score count against you for 12 months.
What Lenders Look at Besides Your Credit?
A mortgage lender will look at more than just your credit rating; they look at the whole credit picture. Adverse credit history, such as late payments, collection accounts, or excessive debt, could cause your loan to be denied.
Credit and Debt Guidelines
How Your Credit Score Affects Your Mortgage Rate
Your credit score is directly tied to the interest rate you receive on a loan. Bad credit often leads to higher mortgage rates and closing costs, leading to a higher monthly payment. Borrowers with a higher credit score will get the best interest rates and loan terms.
579 and lower - If you are approved for a mortgage with this low 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 excellent credit will receive.
680-739 - This is the range most homebuyers are at; your rate will not be affected much in this range.
740 and higher - You will be offered the best rates mortgage companies provide.