Understanding Credit Score Requirements For a Home Purchase



Credit Score Requirements When Buying a House

Buying a house is a big life decision and a complex operation with many important steps. Your credit score is one of the essential elements needing consideration during this process and before deciding to purchase a house.

We have gathered here the essentials about credit score, what credit score you need to buy a home, and how to acquire it. Buying a house with a bad credit score is challenging but not impossible.

For most people, it makes sense to work to improve your credit score before purchasing a home. Let’s take a look at some of the essential considerations.

You’ll have a much better understanding of the credit score you’ll need to buy a home by the time you’re done reading.

What Credit Score You Need

The credit score represents several points that range from 300 to 850, and it speaks about your creditworthiness to all your potential lenders and financial partners.

Your credit score is determined by several factors linked to your overall financial behavior. You can think of it as your money and transactions history.

These credit score points are given by the various credit agencies and companies you have previously worked with. However, keep in mind that not every credit organization and type of loan you ever took grants you the same score.

Also, each of these financial partners has a different set of credit score requirements to grant you the loan for a new home.

Here are the particularities, depending on the type of loan that you intend to get:

Credit score to buy a home

Conventional Loan

For this type of loan, you should come before your future lender with a credit score of a minimum of 620. This is if you want to get a loan under optimum terms and conditions. Having a good credit score really comes in handy with a conventional mortgage.

Not all is lost, even if you are under the 620 credit score. However, you will most likely have to go for a higher than usual interest rate and a higher down payment in this case.

FHA Loan

This is a solution for those who do not have a top score or don’t have significant money for a down payment. The FHA is a type of loan guaranteed by the Federal Housing Administration. They also request a minimum credit score, amounting to 580.

FHA loans are among the most popular types of mortgages for first-time homebuyers due to the lower down payment requirements. If you are purchasing a fixer-upper, a rehab loan known as an FHA 203k is an excellent choice for properties that need work.

VA Loan

The VA loan is backed up by the government and is an option for veterans, qualified service members, and spouses. In this situation, there is not a default minimum credit score limit. However, some lenders have specific requirements.

For example, Rocket Mortgage ® will ask its partners a minimum of 580 credit score before granting a VA loan.

USDA Loan

If you plan on purchasing a house in a rural or suburban area, while your income is below 115% of the average income in the respective area, you can go for a USDA loan guaranteed by the government.

They require a minimum 620 credit score. However, ideally, you should have a score of around 640 to qualify for the best terms and conditions. However, keep in mind that currently, there are no USDA loans available.

Better Understand Your Credit Score

It is not enough to have an idea about what credit score is required in each situation. It is of utmost importance to know how the rating is granted and how you can improve your credit score.

An important component of your credit score is the credit report. Meaning a detailed personal credit history. This is an important document since any mistake here will bring down your scores.

These credit scores are registered within the database of three main financial agencies, including Experian, Equifax, and Transunion. Any potential lender will check with them whenever they analyze whether or not you qualify for their loans.

You can easily check your current credit score with each of them, as you are entitled to ask for your report once per year, free of charge.

It’s highly recommended to check your credit score each year, even if you do not intend to make a home purchase right away. You need to be sure that you have a good credit score and take the right actions to improve it if it doesn’t look terrific. But you also need to check the credit report for any potential errors.

Once you know where you’re at, you have a better idea of what loan to apply for and what other measures to take to improve your chances of getting approval.

FICO ® Score Vs. Credit Score

The three national financial reporting agencies we mentioned above are Equifax, Experian, TransUnion. They all operate in the same manner. They gather information from banks, credit unions, vendors you collaborate with about every financial transaction that you make, about any amount of money you pay on the due date or not.

They compile the data, and the result is your credit score. Several systems and formulas calculate the credit score, and not all lenders calculate it the same.

Models like FICO® Score and VantageScore®, used as a tool by many potential lenders.

Usually, all the financers value most of all these elements:

  • Making your payments on time or earlier.
  • What do you do with the credit amount given.
  • How much credit history you have, the longer, the better.
  • New credit partnerships.
  • The credit types you got so far.

Tips to Increase Your Credit Score

If you want to purchase a new home, the smartest idea is to have the best chances to get a good loan regarding terms and conditions. There are numerous things to consider as a first-timer when you don’t have the best credit. Here are some tips to increase your credit score before purchasing a house:

Pay-Off Outstanding Debts

Lowering your debut is the best way to improve your credit rating. Pay in full, as fast as possible, your debts. Your financial risk factor will drop. The lenders also appreciate the element called credit utilization ratio.

The lender will prefer borrowers who do not rely much on their cards, especially when purchasing a home. This ratio is calculated by dividing the amount you owe to your spending power.

Paying Bills On Time

Mortgage companies and other lenders are also interested in the timely payment of debt. How you pay debts back is what the vendors and banks report to the financial bureaus. So be careful with every single bill you have, from utilities to phone and online purchases.

Do Not Apply for Large Sums

When buying a house, it is essential to keep your other spending habits in check. Taking on additional debt could, in fact, cause you not to be able to get a home loan.

Use a Credit Improvement Company

There are a few companies that will offer you financial advice for free. One of them is Credit Karma. Credit Karma helps by giving you sound financial advice. Using their services will tell you exactly what you can do to increase your credit scoring.

What Else You Need to Know About The Importance of Your Credit Score

In any situation you might be right now about your credit score, do not worry. There are numerous lenders with offers matching your condition.

Plus, the credit score is not the only element needed for you to take the appropriate loan for your new home. Mortgage lenders will also take into account the following:

Debt-To-Income-Ratio

This is the percentage of the gross monthly income needed to pay the debt. The smaller the debt compared to your income, the lesser of a risk you are to lenders.

Loan-To-Value Ratio

Also known as LTV, this is an indicator assessing your risk level. It is calculated by dividing the loan amount by the house price. The LTV ratio drops if you bring in a consistent down payment.

Income and Assets

The lenders need to be assured that you have a continuous flow of income to pay your monthly debt on time. They often ask you to bring them proof of your income and assets over the last 2 years.

Final Thoughts

Many folks don’t have top-notch credit scores who get home loans. While it is advantageous to have a better score, it may not stop you from purchasing.

However, building better credit scores is always worthwhile as it will bring down the total cost of your purchase through lower interest rates. Once you have improved your credit standing, you can plan for refinancing your current mortgage.

You will undoubtedly be able to get more favorable terms that will save a tremendous amount of money in the long run.

Bill Gassett About Bill Gassett

Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys writing helpful articles for buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and here at Realty Biz News. He was the #1 RE/MAX agent in Massachusetts for 2018.