A good credit score is an essential requirement to buy a house. Though some lenders still accept applicants with bad credit scores, they might put higher interest rates than those with good credit scores and history. Buying a house is a significant decision you should consider carefully, and like most Americans, you probably need financing to have one.
So what is the ideal credit score to buy a house? Can I still get a mortgage despite of lousy credit score? Read on to learn more about this matter.
How Much Do I Need?
Credit score requirements differ depending on the type of mortgage loan that you are applying for. Below is a list of the common types of mortgage loans with their average credit score requirements.
Conventional loans refer to the type of loan that is not funded by the federal government and is usually owned by a private lending company. Most conventional loans accept borrowers with credit scores not lower than 620. In some cases, lenders may consider your loan application despite a low credit score. However, expect that your loan will have a higher interest rate compared to other applicants with high credit scores.
The Federal Housing Administration (FHA) provides mortgage loans to families or individuals with low credit scores. Unlike conventional loans, FHA loans accept credit scores as low as 580. This is a good option for individuals or families who don’t have enough funds to pay down payments and high-interest rates. Though this type of loan accepts low credit scores, applicants with high credit scores can get better mortgage rates.
A VA loan is another type of government-backed loan. Military veterans, service members, and their spouses can get a VA loan to buy a house. One must have a minimum credit score of 580 to avail of a VA loan for buying a house.
You can be qualified for a USDA loan if you are planning to buy a house in a rural or suburban area. Additional qualifications include an income below 115 percent of the area’s median income and a minimum credit score of 640.
Can I Still Get a Mortgage Loan Even With a Bad Credit Score?
Your credit score is a vital factor in determining the interest rates and payment terms of your mortgage. Additionally, it can also affect your eligibility for a mortgage, as well as the amount of money you can borrow.
A higher credit score will typically result in lower interest rates and monthly payments, while a lower credit score may result in higher interest rates and monthly payments. It is therefore vital to maintain a good credit score if you are planning to purchase a home.
How to Improve Credit Score
As mentioned, having a good credit score is a significant factor in order to qualify for a mortgage to buy a house. If you have a good credit score, typically 600 or higher, you have a higher chance of getting your mortgage application approved. However, if you have a lower credit score, it’s time to work on improving it.
Follow the tips below to help improve your credit score.
- Monitor your credit score - Credit score refers to the prediction of how creditworthy you are. The score is based on your credit history which includes data on how likely you pay your balances on time and on how frequently you apply for loans. The higher your credit score, the more chances you can get to qualify for a mortgage. You can monitor and check your credit score from any of the following credit bureaus: Experian, Equifax, and TransUnion. Checking your credit score regularly can help you monitor if it’s the right time to get a mortgage loan or if you still need time to improve your credit score to get one.
- Pay your bills and debts on time - Paying bills on time and paying existing debts can help improve your credit score. Remember, your payment history accounts for 35 percent of your credit score. This means that late payments can impact your credit score especially if it’s done frequently.
- Avoid applying for other credits - Generally, the less debt you have means the more chances for you to get your mortgage loan approved. One of the big data analytics companies, FICO, recommends individuals who plan to apply for a mortgage to avoid opening other lines of credit as it may slightly reduce their credit score.
Other Factors to Consider
There are other factors one must consider before getting a mortgage to buy a house such as:
- Debt-to-Income Ratio - This refers to the amount of debt you need to pay monthly as against your estimated monthly income. You need to have a well-balanced debt-to-income ratio, otherwise, it will be hard for you to get approved for a mortgage loan.
- Income - Most lenders check your source of income before approving your mortgage. This is to ensure that you have enough money to pay for your monthly mortgage payments.
- Employment History - Your employment history also plays a factor in getting your mortgage approved. Lenders will look at whether you have worked in the same company for a number of years, or if you are likely to shift from one company to another. This will help them evaluate whether you are more or less likely to lose a job or a source of income.
- Savings - Lending companies will check if you possess enough savings in case of unexpected circumstances. Having adequate savings that can cover at least two months of mortgage payments will give you a higher probability of getting your mortgage approved.
Buying a house is not easier as one may think. In most cases, buyers need additional financing to afford a home. That’s the reason why many Americans opt for a mortgage loan. Getting a mortgage loan to buy a house requires a good credit score and history. The ideal credit score may depend on the lender and the type of loan you are applying for.