Getting a new home can be exciting and overwhelming all at the same time. Along with searching for the best price, location, size, etc., you also must live up to the expectations of loan companies. For the average mortgage lender, a credit score of 620 or higher is typically where your numbers should be in order to secure a loan. The average 620 isn’t always guaranteed that you will get approved for a loan, nor is it the sole factor saying you won’t. A lot goes into a mortgage when it comes to your credit score, so let’s explore it a little further.
Best Credit Score to Buy a House Per Loan Option
Now, let’s talk numbers specific to the loan you are trying to secure. While the majority of buyers are looking for a conventional mortgage, there are other options out there. Overall, a better credit score will get you the best interests and lower payments. But, if you have less than perfect credit, you can still obtain funding and resources to buy your dream home.
Conventional Home Loans
Most conventional home loans require a credit score of at least 620. This number is the bare minimum, and many lenders will actually look for something higher, especially if you don’t have much money to use for a down payment. The higher your credit score you have, the lower your interest rates will be on your mortgage loan. Thus, requiring lower monthly payments during your fixed loan period.
FHA Home Loans
An FHA home loan, through the Federal Housing Administration, has much lower requirements for credit scores, with their lowest approval limit sitting at 500. However, that doesn’t guarantee you will be approved for a loan. Along with a credit score of 500+, you also have to prove you are financially stable and can make your monthly mortgage payments on time. Borrowers are also required to pay off any judgments or liens against them before the closing process is finalized.
Jumbo Home Loans
Jumbo home loans are granted to those purchasing expensive or “luxury” houses. Because these homes cost much more than the average home, a conventional loan isn’t usually an option. When applying for a jumbo home loan, you need an excellent credit score of around 720 or higher. This requirement is to protect the banks that are lending out large lump sums of money. Having and maintaining a high credit score provides lenders with verification that you are financially responsible and have a great track record of repaying your debts.
VA Home Loans
A VA loan is provided to active-duty military members or veterans. Like a conventional loan, the average required credit limit is around 640. Although, like most other loans available, this isn’t set in stone. Some lenders will require higher scores, while others will offer loans to those with scores a little bit lower.
What If Your Credit Score is Too Low to Buy a House?
Your credit score is one of the main factors that lenders investigate when determining who qualifies for a loan. If your credit score is too low, you should put off purchasing a home until you have the time and income to improve it. Before applying for a mortgage, you always want to:
- Check your credit score.
- Monitor your credit rating.
- Pay off outstanding debt.
- Ensure all debt is in good standing.
- Save up enough money to put down 3-20% towards your home.
- Keep your debt-to-income ratio as low as possible.
- Do not open a new line of credit.
By doing these things, you will improve your overall credit rating and will have a much better chance of securing a mortgage loan.
Other Things to Think About
While your credit score is crucial in the home-buying process, it is not the only factor looked into to get you qualified. Other important things banks will take into consideration include.
- Income/Employment: Lenders want reassurance that you will pay back your debt. To do this, they will check into your employment history to ensure you receive a paycheck on a regular basis. Most banks require steady employment for at least 24 months before you file for a mortgage loan. When you are ready to buy a house, make sure you have proof that you can afford to make the payments.
- Savings/Assets- Banks aren’t just interested in how you will repay your loan now, but they want to ensure you will continue to pay it in the unforeseeable future. Some lenders will also look into your investments, retirement, savings accounts, etc., to ensure you will keep making payments even if your current income is lost.
- Loan to Value– The loan to value is a measurement of how much your home is worth compared to the amount you owe on loan. Banks want to see that the house is profitable if they have to take it back at any point. The lower your LTV is, the better your chances you will be approved. (This means putting more money down upfront.)
Should You Purchase a Home with Low Credit Scores?
Many people are eager to purchase a home, especially today when rental properties are more expensive than they have been in the past. For most, a mortgage loan will be more affordable than renting. But should that be a reason to go after a loan with lower credit? The truth is it depends on the buyers. For some borrowers, an increased interest rate due to lower credit scores might be worth it in the end. With that being said, there is always the possibility of refinancing your home once you build your credit score, thus lowering your monthly payments in the future.
Get a Co-Signer
Another option that a lot of home buyers lean towards is securing a co-signer. This person’s income and credit score can help get you a better interest rate and lower your monthly mortgage payments.
Final Thoughts
Although the average credit score required to secure a basic loan is 640, it is always better to go into a mortgage with the highest score possible. This will ensure you get reasonable interest rates with affordable monthly payments.