Probably one of your most considerable achievements, as you build your net worth, is buying your own house. When you finally approach a lender, your goal is to get approved. But it’s not always as easy as you think. Lenders go through a tedious process of credit analysis before they could decide whether to give you a loan or not. And that analysis starts with your credit score.
What is the Minimum Credit Score Required to Buy a House?
If you’re uncertain about your credit score getting a nod from mortgage lenders, you’ll be glad to know that the minimum required credit score to buy a house varies from lender to lender and loan type.
There are at least four most popular home loan types that require different minimum credit scores from borrowers:
|Loan Type||What It Means||Minimum Credit Score Required|
|Conventional||Not backed by any government agency, but must meet the Fannie Mae and Freddie Mac underwriting guidelines||620|
|FHA||Loans backed by the Federal Housing Administration||580 for a 3.5% down payment
500 for down payments of at least 10%
|VA||Loans backed by the US Department of Veterans Affairs (for military members)||No minimum|
|USDA||Loans backed by the US Department of Agriculture (for low- to moderate-income families who buy homes in rural areas)||No minimum, but with a credit score of at least
640 you could qualify for streamlined credit analysis
Note, however, that mortgage lenders are free to set their own minimum credit score required to approve a home loan depending on how they balance out the risk and reward in extending loans to borrowers.
Your Mortgage Rate Depends on Your Credit Score
Your credit score will have a major impact on the overall cost of your home loan, such that a good credit score will earn you a competitive rate, while a bad score will most likely make you struggle to keep up with the mortgage payments.
A credit score in the “good” range (670 – 739) serves as a starting point to qualify for a loan with a relatively good interest rate. But if you’re aiming for the lowest rate, your score must be within the “very good” range (740 – 799).
Your credit score helps your lender to determine your riskiness as a borrower. The lower your score, the riskier you are, hence the higher interest rate they will apply on your loan. A high credit score tells them that you’re a responsible credit manager, and thus merit a low-interest rate.
As of July 2020 using myFICO mortgage loan calculator, for example, a 30-year home would show a credit score and interest rate relationship like this:
- 760 to 850: APR of 2.784%
- 700 to 759: APR of 3.006%
- 680 to 699: APR of 3.183%
- 660 to 679: APR of 3.397%
- 640 to 659: APR of 3.827%
- 620 to 639: APR of 4.373%
How Does Bad Credit Score Affect Home Loan?
You may not be aware that your credit score does have the likelihood to predict how well, or not, you can keep up with a long term loan such as a mortgage.
Borrowers with bad credit will struggle to negotiate for a good rate, let alone be approved. Borrowers with a score below the 600 level may not even qualify anymore. If you get approved even with a bad score, you’ll be slapped with a high-interest rate that will only cause you higher monthly payments compared with someone with a good credit score for the same amount of loan.
On the other hand, lending money for the long term entails such risk, and lenders looking at credit scores provide them a glimpse of the borrower’s delinquency rate within that loan period.
FICO’s research shows how a credit score relates to the likelihood of delinquencies:
|Credit Score||Delinquency Rate|
|800 – 850||1 %|
|740 – 799||2 %|
|670 – 739||8 %|
|580 – 669||28 %|
|579 and below||61 %|
How to Get Mortgage Loan with Bad Credit Score
Luckily, some lenders provide loan opportunities for borrowers with bad credit. Those who have bad credit but still need to take out a mortgage loan could still work on some plans to improve their score and later restructure the loan for better terms and rates.
If you are safely forecasting an improvement in your financial situation in the short term and would not want to pass up a bargain on that dream house you’ve always wanted, then you might want to consider this list of creditors that lend to borrowers with bad credit:
|Lender||Minimum Credit Score||Minimum Down Payment|
|BNC National Bank||640||3%|
|New American Funding||640||3%|
Your credit score is a highly significant factor to both you and your lender when it comes to a mortgage loan application. Taking out a loan at a time when your credit score is in a bad state also carries high financial risk to you – and eventually to your credit record. Take a hard look first on financial capacity and weigh carefully the pros and cons that come with a mortgage loan.