Good credit needed!
Before a new home buyer, especially a first time home buyer, starts looking at homes, they need to obtain a pre-approval for a mortgage. This is necessary so the buyer will know what price range they should be considering. It is also required so buyers and sellers know what type of loan will be used for the transaction. Different loans have different underwriting requirements. This could mean certain home repairs will be necessary prior to the sale, or may mean there will be a longer timeframe required to get to closing.
One of the most critical components of great mortgage rates with no or limited points, is to have good credit scores. The better the scores, the more choices a borrower. This is true in terms of what types of loans they can utilize. Good scores also impact the interest rates and size of downpayment required. In addition, different mortgages could impact what the buyer pays in terms of points.
FHA Credit Score Requirements
Currently, the Federal Housing Administration (FHA) allows borrowers to put down only 3.5%. This is true even if their credit score is below 700. The FHA rules indicate that borrowers with credit scores of 500 or above are eligible for FHA funding. However, a Lending Tree article indicates that a full third of the FHA loans they approve have credit scores of 720 or better. Only 63% are between 620 and 719. A mere 4% of approved loans fall below 620. This means that even though a credit score of 500 is all that is needed for an FHA loan, the requirements for those with low scores knock most of those buyers out of the picture. Lower scores mean higher monthly payments and larger down payments. They may also require higher income levels.
USDA Credit Score Requirements
FHA isn’t the only type of mortgage that is available to those with lower credit scores. For a USDA mortgage, which can provide up to 100% of the purchase price in specific geographical rural areas, there is no minimum credit score required. Not officially anyway, but if your score is below 640, you’d need to provide documentation on why it is low. Getting approved for the loan could be more difficult if not impossible.
Conventional Loan Credit Score Requirements
Credit scores associated with conventional loans could go as low at 620. However, interest rates will be higher at those lower scores. A borrower with a 620 rate might also need to have at least 20% of the home’s purchase price available as a down payment. Many providers of conventional loans will require a credit score of at least 660 or possibly 700 in order to qualify the borrower.
Bottom Line
If you want to buy a home with credit scores below 700, you should immediately focus on getting your scores up. You should do this before you start the pre-approval process. While you may be able to get a loan with scores below 700, the interest rates won’t be as attractive. In addition, your down payment and income will often have to be greater. Finally, your cash reserves will need to be higher.
How to Improve Credit Scores
Information on how to improve your credit scores will be provided in a future blog!