Buying a home takes more than just a big enough down payment or a steady income to get approved for a loan; you’ll also need a solid credit score. As someone who recently went through the home-buying process, I’ve been schooled firsthand on how credit scores affect your odds of being approved. Before you approach the bank for a mortgage, read this to learn what kind of scores lenders are looking for.
A conventional loan is what most people think of when they think of a mortgage. This is a loan that’s backed by either Fannie Mae or Freddie Mac. The minimum credit score you’ll need to qualify for a conventional loan ultimately depends on how large your down payment is and your debt-to-income ratio.
At the low end, a borrower with a 620 FICO score could qualify for a Fannie Mae loan as long as the loan-to-value ratio is less than or equal to 75%. That means you’d need to pony up at least 25% of the purchase price for the down payment, assuming your total debt-to-income ratio is 36% or less. On the high side, you’d need a FICO score of 700 or better if you’re financing more than 75% of the purchase price and your debt-to-income ratio is closer to 45%.
One thing to keep in mind with conventional loans is that Fannie Mae is now using trended data to make lending decisions. Someone who’s paying their credit card bill in full each month is going to be viewed more favorably than someone who carries a balance but always pays on time. If you’ve got balances on your cards, you could help your chances of getting a loan by paying those debts down before applying for a mortgage.
FHA loans are a great alternative for buyers who don’t have 20% or more to put down since they only require a 3.5% down payment. This is the route I took with my home purchase and in terms of the upfront cost, it was a good choice. My lender wanted to see a FICO score of at least 640 to get the loan, which wasn’t an issue, but I was told that I could still qualify even if my score was as low as 580.
So how is that possible? It’s pretty simple. To get a loan with a score of 580 I would have had to put 10% down instead of 3.5%. That would have added up to an extra $8,905 coming straight out of my pocket. The takeaway? If you’re hoping to score a low down payment FHA loan, aim to keep your score above the 640 mark.
USDA and VA Loans
The USDA and VA loan programs are two federally-sponsored initiatives that offer no-down payment loans to qualifying buyers. You can snag one of these loans if you live in an approved rural area or you’re a veteran as long as you meet the credit score requirements. For USDA loans, lenders prefer your score to be 640 or higher. With VA loans, you can go as low as 620 and still get the green light. That’s a plus if you haven’t been able to work on building your credit as much as you’d like.
How To Get Your Score Up to Snuff
Improving your credit often seems mysterious but it’s really not. Prior to buying my home, I employed the tactics that any well-seasoned credit expert recommends: I paid off my credit cards, I resisted opening up new lines of credit and I always made sure to pay my bills on time to avoid black marks on my credit history. If buying a home is one of your financial goals, take our quick two-minute assessment to understand just how vital your credit really is.