The first step for home buyers looking to qualify for a mortgage is to determine their credit score. If you do not have a good enough credit score, you will have difficulty getting approved for a home loan with the vast majority of mortgage lenders. The good news is, there are various home loans available from numerous lenders, brokers and banks where you may be able to qualify with a lower score than you might have thought possible. It also is true that lending standards have eased significantly in the last several years. So, getting approved for a home mortgage this year may be more realistic, if you follow these simple steps outlined in this guide.
What is the Minimum Credit Score for Home Loans?
Below is more information about the credit scores needed to get a home loan for various conventional and government backed programs, including FHA, VA, USDA, Fannie Mae, Freddie Mac, subprime and hard-money loans.
Why Does Credit Matter, Anyway?
The reason that credit is important for getting a home loan is that it is necessary to price what the loan will cost. Lenders use a pricing matrix, generally, that is based upon risk. Your interest rate is usually dependent upon the level of risk the investor and lender is incurring by giving you a mortgage.
Your credit score will be a major factor in the interest rate paid each month and over the life of the loan. The lower your credit score, the more you pay.
For example, if you have a 740 FICO score, this is very high, and you will get the lowest rates in the range of 4% APR as of late 2017 according to Zillow. But if you have a 620 FICO score, you interest rate will be maybe .5% higher in many situations.
There also are special credit scenarios that will influence your credit score. For example, if you have had a foreclosure or bankruptcy in the past two or three years, this will influence credit score. The bankruptcy can stay on your credit report for seven to 10 years.
Remember, the lower your credit score, the more expensive your loan will be and the higher payment you will pay.
Are FHA Loans a Good Fit for You?
While we mentioned previously that credit scores can influence the interest rate you qualify for, with FHA loans, this is not necessarily true. An FHA home loan is backed by the Federal Housing Administration. This means if you fail to pay, the FHA pays back the lender at least some of the principal. This fact means lenders are more able to provide loans to people with lower credit scores. It also means that they can afford to offer low interest rates even to people with lower scores.
- Low Down-Payment Rules
- Easy Credit Standards
- Competitive Interest Rates and Fees
As of 2018, you could qualify for an FHA loan with a 3.5% down payment with a 580-credit score. Your odds of getting a mortgage cleared through underwriting will increase with a higher score, but you have a reasonable chance of approval at this score. In most cases, if you have a fico score below that, you will need a 10% down payment to qualify for most FHA loan programs. The current view on FHA loans with a 580 score is that this is about the entry-point for a credit score to be approved from most FHA finance companies. In most cases, an applicant with a 580 score will typically have a lot of derogatory marks on their credit report, such as overdue payments, foreclosures, judgments and even tax liens. The flexibility and relaxed credit standards are some of the reasons the FHA home loan is the most popular home financing vehicle in the United States today.
Fannie Mae and Freddie Mac Mortgage Options
These are considered “conventional loans’ that can be often be obtained with a 3% to 5% down payment. Of course, there are higher standards for conventional home financing. The most common minimum credit score requirement to get approved today is a 620 FICO. This type of score is typical for people that have high credit card balances or a few delinquent payments in their past. The general consensus on Freddie Mac and Fannie Mae loans is that a 620 score is the entry-point to qualify, but you will need a thorough documentation of income with credit scores in the 620 to 640 range. You will have a better shot to be approved for a mortgage backed by Fannie or Freddie with a 680-credit score and less strenuous underwriting.
- Competitive Mortgage Rates and Fees
- Monthly Mortgage Insurance Is Not Always Required
- Ideal for First Time Home Buyers with Good Credit
What About USDA Loans?
A USDA loan is designed for people who are buying in rural areas and have a lower credit score and income. You may be able to get a USDA loan with 100% financing. As of 2018, you generally need to have a credit score of 640 to 660 to be approved for a USDA loan. USDA loans are only provided to people who are buying homes in areas designated as rural by USDA.
- Government Guaranteed for Home Buying in Rural Areas
- No Money Down Loans with 100% Financing
- Ideal for People with Fair to Good Credit
Consider the VA Home Loan Benefits
VA loans are backed by the Administration of Veterans Affairs and can be obtained with a fairly low credit score. While the VA does not set a minimum limit for credit scores, most VA-approved lenders will want to see a credit score of 620 or higher. If you can qualify for a VA loan, you may be able to get it with 100% financing as well. This program is only available to people who have served in the military for a minimum time or are veterans. It also is available to those who are currently serving in the military.
- US Guaranteed Loans for Military Home Buyers
- No Down-Payment with 100% Financing
- No Monthly Mortgage Insurance & Competitive Rates
- Ideal for Eligible Borrowers with All Types of Credit
What is a Good Credit Score to Buy a House?
Renting a home or apartment has its advantages, but most of us want to buy our own home at some point. Many people want to put down emotional roots in their own home, and it also makes financial sense long term to buy in many cases.
But what kind of credit score is needed to purchase a home in 2018? Below are the answers, plus some tips on how to get into that home of your dreams no matter your current credit score.
Credit Score and Buying a Home
Your credit score affects how much and whether you can buy a home because it dictates if you will be approved for a mortgage. Your credit score is a reflection of the chances that you would not pay the loan. The credit service weighs all of the information on your credit report, including your payment history, how much debt you have, etc., to arrive at a number between 300 and 850 that tells the lender how good of a financial risk you are.
Even after you get approved for your loan, your score will affect your interest rate. This is a big deal because you can pay a lot more in interest charges over the years with a higher rate. A .5% difference in rate can mean paying tens of thousands more in interest over 30 years.
The required minimum credit score for buying a home for 2018 depends upon the type of loan you seek. For a conventional loan with the strictest loan standards, you must have a minimum of 620. But people with a credit score of 640 to 680 will have an easier time being approved.
For FHA financing, you only need to have a 580-FICO score for a 3.5% down payment loan. And in some instances you can get a home loan with FHA with only a 500-credit score, but generally it will be easier with a 580.
FHA home loans are often the best option for people with past credit problems. Those who have a foreclosure or a bankruptcy on their record in the last several years can usually be approved for an FHA loan if they can demonstrate financial stability in the past two years.
Credit score is not the only thing that matters on a mortgage though. Before the mortgage meltdown, no doc loans were issued to people with no income verification, but they had a high credit score. The entire reason the loan was granted was the high credit score. But a high credit score was not enough to prevent defaults in millions of cases. So, these days, the lender is also required to look at your employment record, your debt level, down payment and documented proof that your income is what you say it is.
If you have a higher credit score, you may be able to put less money down. For an FHA mortgage, you would need to put down 10% if you have under a 580-FICO score.
If you are interested in a rural home, you may consider the USDA program. The credit standards for this program are similar to FHA, and 100% financing is available. The home must be in a designated rural area according to USDA. The VA loan program is also a good choice for military members and vets, with very flexible credit criteria and no down-payment loans are possible.
Other Factors to be Approved for a Home Loan in this Economy
Documentation standards are higher on mortgage loans today, so your lender will look at other factors. It is very important for all lenders to verify your employment to ensure you have steady income to afford the mortgage payment. The lender will want to check with your employer to ensure you work there and make what you say you make. You also are required to submit pay-stubs to verify your income.
If you are self-employed, you will need to show a profit and loss statement for the current quarter, two years of tax returns and bank statements. Getting a mortgage with self-employment income does not have to be difficult, but the lender must show that it has carefully checked your income as a self-employed person.
The broker or lender also will look at the house that you want to buy. Some loans will require the house to be in a minimum state of repair. FHA home loans, for example, are available for fixer uppers but the home cannot be falling apart.
Before you make your offer, verify with the lender on the sorts of properties you can buy to avoid not being able to close the deal. The appraisal on the property also must come in at or above the loan amount. The lender cannot lend more than the value of the appraisal.
Can You Still Get a House Loan with Poor Credit?
You can get a loan in 2018 with imperfect credit. FHA loans are possible with a low credit score in the 500’s. Technically, VA home loans do not even have a minimum credit score requirement. The interest rate on these government mortgages are reasonable too. Conventional loans are available with a lower credit score, but you will pay a higher interest rate.
If you have a bankruptcy or foreclosure, expect to need to wait two years from that event before you can get a loan.
If you have no credit at all, you can put a co-signed on the loan application to get approved.
Getting approved for a mortgage loan with bad credit or even a home equity loan with bad credit in 2018 is a simple task. All you need in terms of a credit score is a 580 for a FHA loan and 620 for a conventional loan. Be sure that you can illustrate financial stability in the last 24 months with no late payments, and you should be able to get your home loan done in 2018.
6 Reasons to Check Your Credit Report Prior to Applying for a Mortgage
It is not surprising that your credit score is a major factor in being approved (or declined) for a mortgage. That is why it is surprising that so many Americans do not check their credit report before applying for a mortgage. This is a big mistake. When you have a current copy of your credit report, you have in your hands all of the information you need about your current credit situation. This is very important to understand before you apply for a mortgage.
Below are some of the most important reasons to check your credit before you apply for your mortgage:
There Could Be Errors on Your Credit Report
A study by the FTC in 2013 found that one out of four consumers found errors on their credit report. Some of those errors include things that could negatively affect your credit, including incorrect late payments, double accounts, accounts closed that are still open, and more. You should review your credit report several months before you apply for a mortgage to get any mistakes removed. You can write to each credit bureau and dispute any mistakes on your report; they are required to respond within 60 days.
You Will See What Your Credit Score Is
You should go into your mortgage application process knowing exactly what your credit score is. The higher your score, the more loan options you have. And if you know what your score is, you will have a better idea of the types of loans you should consider. For example, if you have a credit score in the 640s, you may want to consider a home loan insured by the FHA. These loans are guaranteed by the Federal Housing Administration and are easier to qualify for in most cases. Many people find it is easier to change their financial behavior if they see that their past credit mistakes have hurt their score. So, knowing your score from your current credit report is a promising idea.
See What Your Balances Are in One Place
It is helpful to see what all your credit card balances are. Lenders will review your mortgage application to see how much of your gross monthly income is being used to repay debt. A major part of this for most people is credit card balances. Lenders look more carefully at people who are using a lot of their current credit lines. They probably will not offer you the best interest rates if you are carrying a lot of debt. Many experts recommend having credit card balances that are 50% or even 30% less than your maximum credit line. You should review your credit report and target those credit lines with a high utilization first. Once you start to pay them down, you will find that your score will rise dramatically.
See How Your Score Differs
It is important to get credit reports from all three bureaus. You will notice that your credit score can vary by many points between the three. This is because some credit bureaus have only certain accounts reported to them. When you see what the variations are on your credit reports, you can investigate which accounts are being reported to which bureaus. We advise paying off the high balance accounts on the bureau with the lowest credit score. This will give you the most bang for your buck in raising your rate before you apply for a loan.
See Any Negative Marks on Your Credit
When the lender reviews your credit report, it will look for negative marks on your report in the last two years. You should not have any negative, 30-day late marks on your credit report in the past 24 months. If you do, try to not do that anymore. At the least, go to the lender with no late payments in the past 12 months. This can show the lender that you are making efforts in recent times to pay everything on time.
Get Detailed Insights About What Hurts Your Score
When you have your current credit reports in hand, you will have a lot of useful information about your credit and financial situation. You can really see how much that high balance having affects your credit score. Also, you can see how those past due payments are hurting your score. Seeing where you really stand serves as strong motivation for many people to clean up their financial act, so they can get approved for a mortgage.
Below are some helpful financial resources that can assist you as you are getting your credit to buy a home:
How to Restore Your Credit Yourself without Paying a Credit Repair Company
Living with poor credit is doable in America, but it makes life more difficult.
You will have a more challenging time being approved for a mortgage, car loan and other important financial parts of life.
One option is to pay for a company to help you repair your credit, but there are ways to fix your own credit without paying anyone.
This article details how you can fix your own credit without paying a credit repair company.
Get Copies of Your Credit Reports
You need to have a current version of your credit report from all three credit bureaus. Your credit reports will show you the various mistakes you have made that led you to a poor credit situation.
Read through the reports to see what negative items are affecting your score.
You can get a copy of your credit report for free every year at www.AnnualCreditReport.com. You should get all three credit reports if you want to fix your credit because some accounts only report to one or two of the credit bureaus.
Check for Errors
The first thing to look for are major errors:
- Accounts that do not belong to you, payments incorrectly reported late, double accounts
- Past due accounts that have been charged off or sent to collections
- Maxed out credit cards that are over the limit
Any incorrect information on your report should be disputed with each credit bureau. While you can dispute the errors online with each credit bureau, it is better to do it through the mail. You can send proof through the mail that supports your claim. You also can keep copies of the dispute letters. Also, if you send the letters by certified mail, you will have proof of when they were mailed.
If you are successful, the credit agency will update the report and it may raise your score. You also can request to add a personal statement to the credit report to explain a negative item. This may help if a business or lending company manually reviews your credit report.
Pay Past Due Accounts
Your payment history is 35% of your score. If you have any past due accounts, your score is taking a hit. Getting these current is the first thing to do. You want every past due account on the report to show Current/Paid As Agreed.
If the account is more than 180 days late, it has been charged off, which will really hit your score. But if it is less than 180 days, you may be able to get it current by paying it in full. Some creditors may waive late fees and penalties if you contact them.
Pay Accounts That Are Charged Off
Even if they are charged off, they still hurt your score, although this is less over time. Part of your do it yourself credit repair will have you paying off charged off accounts. The charge off status will show on the report for seven years, but if you pay it in full, this will help your score.
Pay Collection Accounts
Pay off any accounts sent to collections. The collection will probably stay on your report for seven years, but again, paying it off in full will help your score.
Pay Off High Balances
Credit utilization is 30% of your score and is the second most important factor. The higher your credit card balances, the more they hurt your score. You should do your best to get your balances no more than 50% of your limit, and 30% or lower is best.
This is one of the biggest areas where you can make a big difference in your credit score fast. Pay down debt and watch your score rise by 20, 30 or even 50 points.
Apply for New Credit
Once you have started to get current on accounts and pay down debt, you may want to open one or two new cards. If you can get them, keep the balances very low and pay them on time each month. This will raise your score.
If you cannot get a major credit card, store credit cards usually are easier to get.
Keep Old Cards Open
If you have an open credit line on a card you are not using, it is smart to just leave it open. The more open credit line you have, the better your credit score.
If you try all the above, you should be able to raise your credit score on your own without paying for a credit repair company.
Below are some free resources to explore as you are working on fixing your credit:
- You can get a free credit report through the Federal Trade Commission here.
- The FTC warns consumers to beware of phony credit repair scams.
- If you have questions about applying for new credit cards, the Consumer Protection Financial Bureau has good information.
8 Methods to Increase Credit Scores Prior to Buying a Home
Most Americans long to own their own home. There is something about owning the home in which you live that makes us feel more secure.
It also is a good financial investment in most cases; with home prices appreciating in 2018 and beyond, owning your own home is a way to grow your personal wealth as your equity in the property rises.
One of the challenges of home ownership, of course, is having a good enough credit score to qualify for a mortgage approval.
The good news is there are ways to increase your credit score before you buy a home.
This article describes some of the ways you can raise your score, so you can be easily approved when you submit your mortgage application.
Get A Copy of Your Current Credit Report
It is hard to know where you stand with your credit unless you have your credit report in hand. You should be aware of any problems that are on your report, as well as any mistakes. At least one in five Americans have credit reports with mistakes on them. Mistakes can include errors showing you made a payment late when you did not. It also is not unusual for a negative mark on your report to be reported more than once. There are many free ways to get a current copy of your credit report. You can get a free annual report from www.AnnualCreditReport.com.
Get Credit Report Mistake Fixed
At least 25% of people who were declined for a mortgage had mistakes on their credit report. When you see them on your report, you need to act to get them fixed as soon as possible. You can find a step by step plan on any of the major credit bureau websites to get mistakes fixed. Generally, you need to write to the credit bureau and point out the mistake on the report and ask them to correct or remove the error. Once you make the claim, the credit agency has 30 to 60 days to respond by mail. A step by step guide to fix a credit report error can be found on the Equifax website.
Stay Current on All Bills
One of the biggest factors that causes people to be turned down for a mortgage today is to have a high number of 30+ day late payments on their credit report. When you have a lot of late payments, it indicates a lack of financial responsibility. If you cannot make your credit card payments on time, it is not as likely you will be able to make a mortgage payment on time. You should make every effort to pay every bill on time, including your utility bills, credit card bills, student loans and car payments. Anything that is more than 30 days late can be reported to the credit bureaus. When you apply for a mortgage, the underwriter will review your payment history for the last two years. If you have any black marks, this can make the approval process harder. It is possible to be approved for a mortgage if you have less than perfect credit history. FHA loans are available with a 3.5% down payment if you have as low as a 580-credit score. However, if you have many late payments in the recent past, it is unlikely you will be approved. Make sure your payment history is golden for at least the past year before you apply for a loan.
Keep Balances Low
One of the biggest reasons that people’s credit scores drop is they have too much credit card debt. It is ok to use your credit cards, but experts advise keeping no more than 50% of your credit lines in use on credit cards. Some even say you should have less than 30% usage. If you have a lot of credit card debt, this is probably dropping your score by 30 points or more. But the good news is, as long as you have been making payments on time, you can raise your score very quickly. You just need to find the cash to pay as much off as you can as quickly as you can. Once you pay down your cards a lot, your score could rise dramatically. Another benefit of paying down credit cards quickly is you will greatly decrease the interest you are paying.
Pay More Than the Minimum Payment
It is important to pay all your credit card bills on time, but it also is key to pay more than the minimum. If you have $10,000 of credit card debt and you only have been paying the minimum payments for the past year, this does not look good when you try to get approved for a mortgage. Even if you are only paying an extra $50 per month, chipping away at your debt makes you look better in the lender’s eyes.
Do Not Move Credit Card Debt Around
There is no easy way around it: The best way to raise your score is to pay off debt as fast as you can. Do not just move the debt to a new card. You can still do this, but most credit card companies will charge a nice fee for you to do this. Yes, you will possibly pay less interest, but the debt is still on your credit report and dragging down your score. You need to pay off some of that debt to increase your FICO score.
Keep Credit Lines Open
There is controversy about this one, but once you pay off your credit cards, it is probably smart to keep the credit lines open. If you close a credit card, you have just taken away that card’s amount of credit from your open credit lines. This can lower your score. If you are tempted to use the card, just put it in a drawer; don’t carry it with you. But leave the cards open.
Do Not Buy a Major Purchase on Credit
When you are applying for your mortgage, do not buy a car or charge a $10,000 vacation on credit. This will lower your score. Keep the major purchases for later after the loan has closed.
If you want to keep on top of your credit score, try these services:
Sources Referenced: Consumer Financial Protection Bureau, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of New York, United States Federal Reserve Bank, Fair Isaac Corp, WhiteHouse.gov