Credit requirements for a home loan in 2019
Anyone looking into home ownership is likely aware that credit scores are an important factor in loan decisions. If you want to know if your credit is on track for a mortgage loan, the following information will help you decide.
What does my credit score mean?
In short, a credit score tells a lender how risky it is to loan you money. The higher your credit score, the less risk you are. The lower the credit score, the higher risk you are. To put it into perspective, imagine that you have a friend who asks to borrow money. You know from other friends that he is not good at repaying loans, and he still owes some of your buddies. Would you be inclined to loan him the money?
Your answer is likely, “No,” which is understandable. When you loan money, you want to get it back. This is how lenders consider loans, as well. If you have a history of not paying your debts, a lender is not going to be comfortable loaning you money.
The credit score itself is calculated by entering different aspects — including your payment history- of your credit into an algorithm. Credit bureaus and other financial departments place the following values onto the numbers this algorithm presents:
800 – 850: Exceptional Credit
740 – 799: Very Good Credit
670 – 739: Good Credit
580 – 669: Fair or Average Credit
Under 580: Poor Credit
The minimum credit score differs among lenders and mortgage loan types. Each has its own requirements concerning income levels, amount required from you for the down payment, credit scores, and interest rates. Below are mortgage loan types along with some basic requirements.
Mortgage loan types
Most mortgage loans fall under one of four types, which are conventional loans, VA loans, USDA loans, and FHA loans. Conventional loans are those typically backed by Freddie Mac and Fannie May, and they require a minimum credit score of 620. VA loans are dedicated to active members of our military and veterans. These have no credit score requirements.
USDA loans are intended for rural areas, such as farms, and a minimum credit score of 580 is required for approval. FHA loans come from the Federal Housing Administration and are available so that low-income families have a chance at home ownership. These require a minimum credit score of 500 and a 10% down payment, but borrowers with higher credit scores can get approved with as little as 3.5% down.
How your credit score affects the home buying process
Besides affecting your chances of approval, your credit score has the power to drive your interest rates and down payment up. Those with credit scores from 740 up to 850 will typically get the lowest interest rates and the best repayment terms. Credit scores from 670 to 739 will usually still get fair interest rates and terms, though it may take shopping around a little. Those with a 580 or less can expect to receive the most unfavorable terms.
For those who have less than stellar credit, do not lose hope. You can improve your credit score by paying your bills on time, working on paying down the debts on your credit report, and not charging items that you cannot afford to repay. After a few months, barring any unforeseen circumstances, you should begin seeing a rise in your score.
Fortunately, there is no one-size-fits-all approach to mortgage loan approval. There are guidelines to follow, but there are many mortgage lenders available. Some have less stringent requirements than others, so your credit score will not necessarily stop you from buying a home. Aiming for a higher credit score first, though, can save you a lot of money in the long run.