So, you want to own a home and need to borrow money to buy it?
There are many factors that contribute to getting a home mortgage. For starters, you have to determine how much house you can afford given your current income and expenses. You then have to prove your income is reliable and that have enough money saved in your bank account to cover the down payment and closing costs.
You’ll also need a solid credit score to get approved for the loan. In fact, your credit score is the biggest factor when determining whether you’ll be approved or rejected for financing.
If you’re in the market for a house and are wondering if your credit is good enough to qualify for a mortgage, here’s what you need to know.
A Higher Credit Score Will Save You Money on Your Mortgage
There are quite a few perks that come with having a high credit score. One of those include qualifying for low interest rates.
Because home mortgages tend to be quite large – often in the six figure range – the slightest variance in your rate can make a huge difference when it comes to your monthly payments and the amount of interest you’ll pay over the life of the loan.
If you have a low credit score, lenders typically scrutinize your application more closely since they will have to rely on other aspects of your profile to qualify you for the loan. And, if you’re lucky enough to qualify for a mortgage with a low credit score, you’ll likely receive a higher interest rate to make up for the level of risk you potentially pose to the lender.
In short, if you have a great credit score, you can save big bucks over the life of your loan.
What Type of Credit Will Get You a Mortgage?
You now know that lenders are more apt to grant loans to borrowers with excellent credit.
Credit scores range from 300 to 850. Generally, these are the categories you can fall into as a borrower, depending on your credit score:
Excellent – 750 and up
Good – 700 – 749
Fair – 650 – 699
Poor – 550 – 649
Bad – 550 and below
Can you still get a mortgage if your credit score is “bad”? This depends on the lender and the type of mortgage you’re applying for.
A conventional mortgage is one of the most common mortgage types and the minimum credit score you’d need to qualify is typically 620. An FHA loan has more lenient requirements as it’s backed by the Federal Housing Administration, so you may be able to get this type of loan with a lower score.
Here are a few other types of mortgages and the minimum credit score you’ll need to qualify.
- USDA Loans – 640 Credit Score
- 203k Loans – 620 Credit Score
- Jumbo Loans – 700 Credit Score FHA
- Streamline Refinance – No Credit Check
- VA Streamline Refinance – 640 Credit Score
- HARP – 620 Credit Score
- Home Equity Loan or Line of Credit HELOC – 680 Credit Score
Can You Get a Mortgage if You’ve Filed for Bankruptcy?
If you’ve filed for bankruptcy or had some serious negative marks on your credit, you may be wondering if you can still buy a home. The answer is yes – with some work on your end.
While filing for bankruptcy will damage your score, you can rebuild your credit and still become a homeowner. But, you may need to wait for a period of time depending on the mortgage you’re applying for.
For example, with a conventional Fannie Mae loan, you’d need to wait at least two to four years after you receive a bankruptcy discharge. The waiting period can be increased by another year if you’ve had a bankruptcy foreclosure.
How Lenders Check Credit for Co-Borrowers
Will you be applying for a mortgage with a co-borrower, like a partner or a spouse? If so, both of your credit scores will be considered in your loan application.
For a joint mortgage, the lender will pull each person’s credit scores from the three major bureaus: Experian, TransUnion, and Equifax. Then, the lender will take the middle score and choose the person with the lowest middle score to use for the mortgage application.
For example, let’s say borrower #1 on the joint application has these three credit scores: 730, 720 and 695. Borrower #2 has these three credit scores: 690, 655 and 640. The middle scores are 720 and 655, respectively. The lowest score out of the two is 655, and that’s what the lender will go with.
Keep in mind that the 720 credit score may have resulted in a lower interest rate. This is why it’s important to review your co-borrower’s credit score ahead of time. From there, you can work to improve both of your scores before applying for a mortgage.
Aim Higher Than the Minimum
When it comes to getting your credit ready to buy a house, try to aim higher than the minimum credit score accepted. This may mean putting your goal of homeownership on hold while you work on improving your credit. But, in the end, it will be worth it.
Owning a home is probably the biggest purchase you’ll ever make. In turn, saving money on a mortgage by having excellent credit can make a huge difference in your financial life.