What Credit Score is Needed for a Home Loan?
When applying for a home loan, one of the first questions that comes to mind is: What credit score do I need to qualify? This question is crucial because your credit score not only impacts your eligibility but also determines the loan terms and interest rates you’ll receive. In this guide, we’ll break down the credit score requirements for different types of loans and offer tips to improve your chances of securing the best possible mortgage.
What Credit Score Do You Need for Different Loan Types?
Lenders pull your credit scores from the three major bureaus: Experian, TransUnion, and Equifax, and they use the middle score from the lowest borrower if there are multiple applicants. Here’s a breakdown of the minimum credit scores required for different loan types:
- Conventional Loans: The minimum credit score required for a conventional loan backed by Fannie Mae or Freddie Mac is 620. However, conventional loans are highly sensitive to credit scores, and you’ll get much better rates if your score is above 660, 700, or even 740.
- FHA Loans: FHA loans can go as low as 580 with a 3.5% down payment. If your score falls between 500-579, you’ll need to put down at least 10% to qualify, though getting approved at this level can still be challenging.
- VA Loans: While the VA does not set a minimum credit score, most lenders require a score between 580-620. If the borrower’s credit score is on the lower end and they are not approved through the automated underwriting system, they will need to have a clean credit history over the last 12 months (no late payments, collections, or other derogatory marks).
- USDA Loans: For a USDA loan, the typical minimum credit score is 640. USDA loans tend to be more complex, but they offer great options for rural homebuyers.
How to Improve Your Credit Score Before Applying for a Mortgage
If your credit score is below the ideal range, don’t worry—there are ways to improve it. Here are some strategies you can implement:
- On-Time Payments: Your payment history makes up 35% of your FICO score, so ensure you make all payments on time, especially in the year leading up to your loan application.
- Credit Card Utilization: Keeping your credit card balances below 30% of their limits can boost your score. If possible, aim to lower it further, as reducing balances closer to 10% or even 0% can have a substantial impact.
- Credit Mix: A diverse credit portfolio is also beneficial. Having a mix of credit cards and installment loans, such as car loans or existing mortgages, shows lenders that you can manage multiple types of credit responsibly.
- Authorized User: Being added as an authorized user on a well-managed credit card can give your score a quick boost. If the card has been open for a long time and carries a low balance, the positive history will help improve your score quickly.
Can You Buy a House with Bad Credit?
Yes, it is possible to buy a home with bad credit, although it may require more effort and flexibility. Government-backed loans, like FHA and VA loans, tend to be more lenient toward borrowers with lower credit scores. However, lenders will look at your recent payment history and may require a solid explanation for any past credit issues. If your credit history shows improvement over the last year, you stand a much better chance of getting approved.
Factors That Lenders Consider Besides Credit Score
While your credit score is crucial, it’s not the only factor lenders take into account. Here are some additional elements that could influence your mortgage approval:
- Down Payment: A larger down payment can help offset a lower credit score, especially for FHA loans where putting down 10% can allow borrowers with scores below 580 to qualify.
- Reserves: Lenders want to see that you have funds remaining after your down payment and closing costs. Having six months’ worth of mortgage payments in reserves can significantly boost your approval odds.
- Debt-to-Income Ratio: A low debt-to-income ratio is also important, though it’s typically less critical than your down payment and reserves. Lenders want to ensure you’re not overextended financially, so maintaining a low ratio of debt to income improves your chances of approval.
How to Check Your Credit Score and Report
To check your credit report, you can go to AnnualCreditReport.com for a free copy from each of the three bureaus once per year. However, this report does not include your FICO score. To see the specific FICO scores that mortgage lenders use (FICO 2, 4, and 5), you’ll likely need to subscribe to a service like MyFICO. Keep in mind that most free credit monitoring services, like Credit Karma, display your VantageScore, which can be 10-40 points higher than the FICO score lenders use for mortgages.
Why Choose Loans in KC, LLC for Your FHA Loan?
At Loans in KC, LLC, we pride ourselves on being one of the few true mortgage brokers in the Kansas City area. Unlike many brokers who are tied to a single lender, we shop around with multiple lenders to find the best rates and terms for our clients. Jason shared that while many brokers only work with United Wholesale Mortgage, Loans in KC, LLC has a wider network, allowing us to match our clients with the great deals.
We also specialize in FHA loans, ensuring we navigate the nuances of the program, including credit disputes, property requirements, and maximizing your loan options.
Ready to take the next step toward your dream home? One of our expert loan officers can help get you a pre-approval today. Whether you’re looking to buy, refinance, or explore your eligibility, we’re here to help you find the perfect loan for your unique situation. Start your homeownership journey with us today!