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Are you wondering what credit score is necessary to purchase a house? When you apply to a lender for a mortgage, they will take a lot of notice of your FICO score. This helps them assess what loan you will qualify for, which is very important.
When buying a house, you need to understand your credit score and what you need to get a mortgage.
Credit improvement companies such as Credit Karma or Credit Sesame can help those who would love to own a home but have credit scores that need work. Using these sites gives you the tools to make the right credit decisions to improve your credit scores.
The benefit, of course, ultimately comes when you apply for a loan to purchase a house. Those with exceptional credit scores get rewarded by lenders with better mortgage terms. Over the time you have your mortgage, the savings can be substantial when you have a lower interest rate.
Let’s look at what credit score you need to buy a house for the different types of home loans available.
Do I need a good credit score to buy a house?
You might be pleased to hear that you don’t need perfect credit when applying for a mortgage. In some situations, you might be able to get away with a score below 600, though you will get much better terms on your mortgage if your credit score is higher.
Generally, if you are looking to get a mortgage, you should have a credit score of 620 or better. But if you want lower interest rates, which will save you thousands over the mortgage term, you’ll want a score above 740.
Before we look at the minimum credit scores required for the different types of loans, it should be noted that these minimums can change. This can happen when lenders believe the economic situation is more precarious and, therefore, want to reduce their risk.
For example, some lenders have raised their minimum requirements thanks to the pandemic and increased interest rates or down payment requirements. When researching a lender to use, it will be essential to do a bit more due diligence.
What minimum credit score do I need?
The minimum credit score requirement will depend on the type of loan you are looking to get. When looking at government loan programs, individual lenders can set their minimums, which will vary between providers. There are numerous first-time buyer mortgage programs, and we will take an in-depth look at some of them.
FHA Loans
The Federal Housing Administration has a loan program with a minimum requirement of 500. If your number is under 580, you will need to find a down payment of 10%. However, if your score is higher than 580, you will qualify for a 3.5% minimum down payment requirement.
If you have a minimum score of 500 or close to it, the FHA program will guarantee the lender’s loan, but they will still want to ensure your financial situation is as secure as possible. This might mean that they need you to deal with and pay off any liens or collections you have.
It should be noted that most lenders will not accept a borrower that has a credit score near 500 even though it is stated they could. Many lending institutions steer clear of home buyers with low credit scores.
Because of the low down payment requirement, FHA loans are among the most popular among first-time home buyers.
USDA Loans
The Department of Agriculture program doesn’t have a minimum score requirement, though typically if your score is 640 or better, you shouldn’t have a problem getting approved.
USDA mortgages are given to borrowers purchasing a home in a rural area. So, if you are looking to buy in the city or a densely populated suburb, it is unlikely you’ll be able to get a USDA loan. You will need to meet the qualifications to get this type of loan.
However, a significant benefit if you qualify is that it’s one of the few no down payment loan programs.
VA Loans
The Department of Veterans Affairs also doesn’t have a minimum requirement. If you are either a veteran, active duty, or an eligible spouse, the VA program offers many benefits, including lower interest rates and closing costs.
The lender may have their own requirements for a VA loan, which could mean you need a similar score to the USDA of 640. However, the average home buyer that uses a VA loan has a score above 700.
VA mortgages are also attractive because of their no down payment option.
Conventional Loans
Often applicants for a conventional loan will need a score above 620. According to the latest data, the average homeowner has a score of around 750.
If you have a higher score, you will pay less private mortgage insurance when you have a down payment lower than 20%. If you have a 10% down payment with a credit score of 620, you can expect to pay 1.1% PMI.
But if your credit score is 760, you might only be paying 0.3%, a significant saving until you have enough equity in the home to stop paying PMI.
PMI is a needless expense that only protects the lender. It is further reinforcement of just how vital it is to work on increasing your credit score. A solid credit score will reduce your cost of homeownership.
Jumbo Loans
If you need a loan that is more than the conforming loan limit – currently $548,250 in 2021 – you need a jumbo loan. For this type of mortgage, you will require an excellent credit score.
Expect to need over 700 or more. Since the loan value is larger, there is more at stake for the lender, so they need you to have a great financial history. Jumbo loans are considered riskier, hence the more stringent credit requirements.
Also, be prepared to verify large cash deposits. Lenders will be scrutinizing this information much more carefully.
You Also Have a Home Insurance Score
A home insurance score differs from your credit scores but is still vital to know because they affect the cost of your home insurance.
Home insurance scores and credit scores perform different functions, but your credit history will play a role in determining your home insurance score. Believe it or not, your credit history is a good indicator of whether you’ll file an insurance claim at some point, based on recent studies.
Much like creditors, the better your home insurance score, the lower risk you pose. While it is possible to get home insurance with bad credit, as a general rule, the better your score, the better chance you get lower home insurance premiums.
Home insurance companies use these scores because they are valuable in predicting whether you’ll file a claim resulting in losses for the insurance provider.
What can I do to improve my credit score?
If your score is lower than you would like or not good enough for the type of loan you want, you can do things to change the situation. But if you have bad credit or no credit history, it might be better to get a co-signer to get the loan.
It would help if you had someone willing to guarantee your loan and who has a good credit score.
How to Boost Your Credit Score
So that it is easier for you to be approved for the loan you want and with better terms, you should work on improving your score. There are many things worth researching when it comes to credit scores. You might find it worth it to delay your search for a home while improving your score.
To begin to see improvements in your score, here’s what you need to do:
Get your credit report: You can get this for free from AnnualCreditCheck.com. This will allow you to see if the credit bureaus have any incorrect information about you that could be affecting your score.
If you do find a mistake, contact the bureau to have it corrected. Your credit report will give you your score to monitor your progress in improving it.
Paying your bills: Payment history affects your score, so don’t miss payments.
Credit card balances: The amount of credit you use compared to the total available is an important factor in making up your score. Try to use about 30% of your available credit. To help with this, don’t cancel cards you don’t use. Instead, use them occasionally, so they don’t get closed.
Credit types: It is better to have a mix of different credit lines. If you only have one type of loan, like a credit card, it could be hurting your score.
If you work on these scoring factors, you will find your score is stronger after a few months, and you will save yourself a lot on your mortgage. It will also make getting the loan you need from the lender easier and offer you the best rates.
Credit Scores are Worth the Effort
It is vital to have your financial house in order when purchasing your first home. Spending the time to work on your credit will pay you back in kind. Hopefully, you have found this guide to credit scores when buying a home useful.
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