Ahhh...there's nothing more enjoyable than embarking on a house hunt. After all, your new place is where you'll create new memories, lay down roots, start or expand your family, and more. But, how do you get a home you love at a price point that's also affordable?
To answer that question, it's important to understand the different factors that ultimately determine your eligibility for a home loan - the biggest of which is your credit score.
Stated by credit repair experts, mortgage lenders see your credit score as a representation of how financially responsible you are, and whether or not you may be a risky borrower.
What Credit Score Do I Need to Buy a Home?
Unfortunately, there isn't a simple, concrete answer to that question. Why? Because credit requirements will differ from lender to lender just like they vary depending on the type of home loan you apply for.
Generally speaking, if you want to enjoy the most savings on your home loan, you need a good credit score. However, you don't need to possess perfect credit to qualify for a mortgage loan. Your credit score will influence the types of rates you are offered.
In other words:
If you hold a higher credit score, it'll both raise your eligibility to qualify for a loan and save you tons of money in terms of interest you'll owe.
How Do I Access My Credit Score?
Before applying for a loan, you should first know where you stand in terms of your credit. By doing so, you'll be able to determine which home loan is right for you and take the necessary steps to improve your score (if needed).
Today, there are a number of ways you can gain access to your credit score. You can utilize online resources, like Credit Karma, which will provide your score for free, or you can directly contact each of the three main credit bureaus to request a copy of your report.
Here are their numbers for easy access:
1. Experian: 877-FACTACT (322-8228)
2. Equifax: 866-349-5191
3. TransUnion: 833-395-6938
You can also request a free annual copy of your credit report online.
What's Considered a Good Credit Score?
In order to assess your creditworthiness, lenders generally use a scoring system called FICO, which ranges from 300 to 850. To get an idea of where you currently stand, here's how FICO scores are classified:
● 300-579 - Very Poor
● 580-669 - Fair
● 670-739 - Good
● 740-799 - Very Good
● 800-850 - Exceptional
If you're wondering how you compare to the average American, Experian says that an estimated 66% fall into the "good" or better range on the FICO scale. So, what does that mean in terms of securing a loan and buying a new home?
Let's take a look at some of the more common types of home loans. This will give you an idea of the minimum requirements you must possess and the different types of loans available to you.
FHA Loans
For borrowers who possess a lower credit score, loans insured by the Federal Housing Administration (FHA) may be a good option for you. In order to qualify for an FHA loan, you must have a minimum credit score of 500 and be able to put down a minimum of 10%.
They will offer loans with a lower down payment, but only for those who have a credit score of 580 or higher.
Conventional Loans
To apply for a conventional loan, borrowers typically fall into the 'good' or better range when it comes to their credit score. To qualify for this type of loan, you can expect a requirement of a 620 or higher credit score.
USDA Loans
Backed by the U.S. Department of Agriculture, USDA loans were created to support borrowers who are purchasing a home in a rural area. The minimum score usually required to qualify for a USDA loan is 640.
VA Loans
These types of loans are supported by the Department of Veterans Affairs and are intended for either active military personnel or service veterans. Lenders issuing VA loans typically require a score of 620 - however, the government does not require a minimum credit score in order to qualify.
Jumbo Loans
Government-sponsored outlets, like Freddie Mac and Fannie Mae, have certain limits in regards to the amount you can borrow. Jumbo loans were designed to bridge the gap for amounts that exceed those limits.
As of December of 2019, the limit has been set at $510,400 - which is applicable for all states apart from Hawaii and Alaska. To qualify for this type of loan, lenders generally look for credit scores that fall within the mid to upper 700s.
Final Thoughts
While there are additional qualifications that are factored into a home loan, such as your income, level of debt, and down payment amount, your credit score is by far the most important element.
Always be conscious of ways you can improve your credit score, like making payments on time or keeping your credit card balance below 30% of the available credit. By taking steps to raise your score, you will subsequently open more doorways when it comes to procuring a home loan.
