Having a good credit score can facilitate getting a loan with lower interest rates and fewer charges. Your credit score reflects your past performance in repaying a loan. Many factors can affect your credit score, but not paying a loan on time is the most significant. The more you pay loans on time, the better your score can be. With that, you can get a loan of larger amounts with a better credit score.
While asking for a loan, lenders check your credit report to see your credit score. If it is below the minimum credit score, they’ll either hesitate to offer you a loan or will charge a high-interest rate on this. Since they doubt you’ll repay the loan or its installments on time, they have to put such terms and conditions. Now, if you want to finance a house, it is better to know what is a good credit score to buy a house.
On average, 670 to 739 is considered a good credit score. But for a house, your credit score should lie between 500-700. However, it depends more on your lender and the type of mortgage loan you want. Typically, mortgage lenders are comfortable offering a loan to someone with a credit score above 630. So, we can say that you should at least have a score of above 630 to get a loan for your house.
You can get a loan with a lower credit score, but its terms and conditions might not be suitable. You’ll need to pay hefty charges, put an asset as security, and have high-interest rates. In contrast, a good credit score can save you from all the hassle. Also, you can get your desired amount easily without complicated terms.
What Credit Score do You Need to Buy a House?
You don’t require a flawless credit history to get a loan to buy a house. Instead, your credit reports only need to reflect your credit history as good or average, where you rarely get late on your payments. For most of the loans including personal loans, home loans, and loan against property you’ll need a credit score of 620, but with a higher credit score, you have a higher chance of your loan approval.
Repaying the loan is not a huge problem for people; the problem comes with the extra charges and interest rate they have to pay. People having more than 700 credit scores have more chances to avoid hefty interest rates. To make things easy, we’ll mention each loan type with its minimum or average credit score required to finance a house. Remember, while the credit score to buy a home is different for each loan type, the factors that can affect your credit score are the same for each loan.
If you want an FHA loan (Federal Housing Administration), you should have a minimum credit score of 500 to qualify. They’ll charge you a higher down payment at a minimum score, but your chances of getting the loan are still high.
On the other hand, having a score of 580 or above can help lower the down payment. This also prioritizes you in the FHA listing for the loans, which means you have more chances of getting them.
That said, the lender can change the credit score due to economic uncertainty or other reasons. Before proceeding, it is better to ask the lender first about the minimum credit score for house financing. That way, you won’t come empty-handed due to your credit score not meeting the updated minimum requirements.
The financial bureaus also have the power to alter the average credit scores. Which also forces the lenders to change their minimum requirements. However, some lenders don’t care about a minor variation in your credit and good credit score. For example, If the average FICO score for home financing is 670 and your credit score is 600-630, they might consider your application and treat you the same as a person having a higher score than you.
In the end, it all depends on your lender. If you have improved your credit score in less time, that also gives you an edge for getting a loan, as your credit reports will reflect an excellent performance.
You can get a conventional loan with a credit score of 620, but mortgages often require a higher score. You might need a credit score of 750 or above to get a conventional loan with favorable terms and conditions. With a lower score, your lender will offer strict terms that might increase your overall amount, making it complicated to pay.
On the other hand, borrowers with good credit scores also get a break from Private Mortgage Insurance (PMI). PMI is mandatory for borrowers with a low credit score and a downpayment of less than 20%. For example, a borrower paying 10% as a down payment will be paying 1.1% PMI. Keep increasing the score to 750; your PMI might be less than 0.3%.
To summarize, we can say that a good credit score for a conventional home loan is 750.
Department of Veterans Affairs offers VA loans, and they don’t have a government-set minimum credit score limit. Instead, they only require you to be a veteran, an active soldier, or an officer in the military. You can also take a loan if you are an eligible spouse of an active-duty military member.
Since there is no predetermined limit, VA lenders choose their credit score. On average, you’ll need a credit score above 600 to get a favorable mortgage loan, and it can go up and down based on the lender and the amount you want.
If you require a loan that goes above the traditional loan limit (a jumbo loan), most creditors will require a credit score of above 700. Lending a high amount is risky, and lenders want to be sure to provide it to someone who has an excellent credit history.
If you want the best jumbo loan rates, take your credit score above 740. If you are unsure of how much difference a minor increase in credit score makes, try a mortgage calculator.
Like VA Loans, USDA loans also don’t have any predetermined minimum limit. The lenders choose a minimum credit score based on the amount you want. However, if you have a credit score above 640, you have more chances of getting a USDA loan.
How to Strengthen Your Credit Score
A low credit score doesn’t mean you will never get a loan. As soon as your credit score returns to normal, you can start taking loans to fulfill your expenses.
Keep paying everything on time, whether your bills or old loan installments. Your payment history is the most significant factor that highly impacts your credit score. Moreover, payments on the time shown in your credit report make it easy for lenders to offer you a loan as they know they don’t have to remind you of the payments.
Credit Card Balances and Keep Credit Card Active
Don’t use more than a 30% credit limit on your credit card if you want to see a huge improvement in your credit score. How much available credit you use is also called credit utilization; a lower credit utilization ratio is another important factor you should look out for.
Most people stop using a credit card, and the company closes it, reducing the amount of available credit you have. Lower available credit dings your credit score, impacting your mortgage chances. It would be better to use the credit card occasionally and pay back the amount on time. Keep your credit cards active so the issuer won’t close them due to inactivity.
Check Your Credit Reports
Your credit reports have all the details about what is causing your credit score to go low. Check your credit reports often, see the culprit factors, and try to improve them. Sometimes, there are factors you never thought about to lower your credit score, but they mess with the score the most. You can get one free credit report from each of the three credit bureaus, so grab a report and utilize it properly.
Apply for New Credit in Small Quantities
You can apply for a new credit card or a small credit-builder loan to improve your credit score. You should wait six months before applying for a mortgage again. That way, you’ll have plenty of time to improve your score. Take some small loans and pay them right on time to build your credit score. On the other hand, get a new credit card or increase its limit to have more credit balance which also impacts your credits core.
Get a Debit Consolidation Loan
If you have many outstanding debts, you can get a debt consolidation loan from the bank to pay them. That removes all your debt and gives you a chance to repay the loan faster to improve your credit score. However, this should be your last resort; if you don’t repay the loan on time, be ready to reduce your credit score.
Get a Mortgage With a Bad Credit Score
If you have a bad credit score, you should not give up on your dream to get a house. If the above methods can’t help you improve the score, here are a few ways to get a house with a bad credit score. Primirality, the FHA loan is an excellent option for those with bad credit but if your score is even lower, check out these suggestions.
A Larger Down Payment
A more significant down payment than a traditional one reduces the risk of rejection while applying for a loan. This reduces the risk of the lenders approving a loan; thus, if you have bad credit, choose a larger down payment.
Get a Co-Signer
Getting a partner or a co-signer in a mortgage reduces the chances of rejection. A person agreeing to take responsibility for paying off the mortgage is an excellent choice to get your loan approved. However, ensure the person you choose has a better credit score than you. It would be great if their credit score is above the good limit so the lender won’t hesitate to trust them.
Co-signer doesn’t have to live with you, but they’ll share the ownership of the home. You can agree on how much each person will pay; the lender has nothing to do with this.
Extend Your Search
The market is full of lenders ready to offer loans to those in need. A mortgage loan is large, so many lenders hesitate to provide it to people with bad credit. However, some lenders willingly give mortgage loans to such people, but with higher interest rates.
So, if you want a mortgage, take it with high-interest rates. However, add a term to the contract to lower the rates once your credit score improves while you pay the mortgage. If a person is willing to offer a mortgage on bad credit, they’ll surely help you by offering flexible terms.
Get Money From the Retirement Account
This is a bit risky, but this is an excellent option if you are a loyal company employee with a good employment history. Withdraw funds from your retirement account, pay a sizeable down payment, or show your lender that you have lots of savings. That’ll remove the issue of bad credit, and your lender will offer you a mortgage. However, this option comes with some risks.
If you are 59-1/2 years old when taking such funds, you’ll have to pay a ten percent penalty on the withdrawal. You also have to pay taxes on this. If you get fired from your job before your time is up, you have 60 days to pay back this amount.
Factors to Check Before Applying for a Home Loan
Applying for a mortgage loan is much more complicated and time-consuming than a personal loan. You must prepare lots of stuff because missing one important document can waste even more time. Before applying for a mortgage loan, you should keep a few things in mind.
Check Your Credit Score
It is always better to check the minimum credit score requirements of the mortgage loan you want before applying. While it won’t impact your credit score, it’ll waste your and the lender’s time. We shared the minimum credit score requirement of each loan type, be sure to go through them to get a better idea. If your credit score is low, you can opt for the factors we shared above to improve your credit score, and once it passes the threshold, apply for the loan and get guaranteed approval.
Check Which Mortgage Type Suits Your Requirements
Eight types of mortgage loans are available, including fixed and adjustable-rate mortgages. Knowing which mortgage type you want would be beneficial so you can prepare for that and easily get it. From a borrower’s perspective, taking a 30-year fixed mortgage is better since you have to pay less monthly. However, this requires an excellent credit score since the lender has some risks offering such long terms.
On the other hand, if you don’t want to stick with the fixed interest rate, taking an adjustable-rate mortgage loan is beneficial. You never know when the interest rate in the market will go down, reducing your monthly payments.
Check and Compare Lenders
Don’t just opt for the first lender you see while searching for mortgage loans. We highly recommend checking multiple lenders and comparing their terms before choosing one. Several platforms act as connectors between borrowers and lenders, so if you want to compare lenders in bulk, these platforms are a good option.
Choose the lender with flexible and favorable terms; instead of choosing the one with the lowest interest rates. Ask them about the charges and read their terms and conditions to see if they have any hidden charges. These connecting platforms will not charge fees for filling out the form to check for available lenders.
This is the part where lenders check your credit score, employment history, and other factors to decide if you are eligible for a loan or not. You can start by choosing the desired amount. If the lender finds everything up to the mark for the loan, they’ll ask you to gather the necessary papers.
The next step is to collect all legal papers related to the loan. These papers contain your information, loan amount, terms, repayment options, cancellation policies, interest rates, and loan terms. You must check everything thoroughly so it won’t cause any confusion in the future.
Find Your Home
Despite approving all the documents, the lender won’t provide you with the loan until you show them the house. In most cases, the lender will pay for the house, and the owner will provide you with the key. However, the lender sometimes offers you the money to get a house, so this checking step is necessary.
Other Factors Lenders Check Before Offering a Home Loan
Your credit score might play a significant role in getting the loan, but some other factors also play an essential role.
Your Income or Employment History
You’ll be repaying the loan with your income, so the lenders must check how much you earn in a month. It doesn’t have to be fixed, but it should be enough that a lender feels comfortable while offering a loan. On the other hand, being an employee at the same company for more than two years is a plus point, and your tax returns also show how responsible you are. Such factors can help you get a bigger loan at favorable terms even if your credit score is relatively low.
Substantial savings, investments, and retirement accounts make you much more attractive to lenders. The more assets you have, the easier it becomes for you to get a loan. The lender will have no doubts that you’ll delay your installments since they can see you already own a significant amount of money. On the other hand, running a successful business can also help get a loan much easier than usual.
Down Payment and Debt-To-Income Ratio (DTI)
Agreeing to a large down payment can increase your chances of getting a home loan. However, you need to be careful not to take much out of your emergency savings. Typically, people agree to pay 5-10% in down payments, but you can pay up to 20% or above to facilitate your loan process.
Lenders calculate the DTI ratio to check for an affordable monthly mortgage payment. The DTI ratio shows how much you earn per month and how much you owe in monthly payments. You can easily grab a loan from any lender if you have less than a 28-38% ratio. Keep in mind that with a higher ratio, the lender might refuse to offer a loan despite your good credit score.
Your loan term can easily affect your credit score as lenders are unhappy if you ask for more time than average. Typically, a mortgage loan can go up to 30 years, but most lenders don’t offer more than 15-20 years as repayment time.
Lenders offer less repayment time because the interest rate can change dramatically, and they don’t want to get less interest. On the other hand, borrowers pay less principal each month, making it tempting for them to choose a more extended repayment period.
How to Apply for a Mortgage
Once you have everything, applying for a mortgage is not that difficult. However, it takes time for the lender to process the loan, which sometimes takes up to a month, so be patient.
Start with filling out a mortgage application form; this might take up to 20-30 minutes. If you get preapprovals from more than one lender, this process can take up to one or two hours. After that, review your loan estimates; principal amount, total cost, and APR. Ask the lenders about them and check which one is the most suitable.
After choosing a lender, it is time for them to process the loan. They might ask you questions in this process, so be ready to answer them promptly until the processing days are over. After that, the underwriter will come and ask some fundamental questions related to repayment and property. Answer them, and you are ready to get your loan once they are done. The process might take up to a month, but you’ll feel the wait worthwhile once you get the loan.
Alternatives to Traditional Mortgage
If you can’t be able to get your credit score high enough to get a mortgage on favorable terms, here are some other options you can opt for. It is not always mandatory to get a loan from a financial institution; many people around you can provide a loan to get a house.
Borrow From the Family
Your parents and other family members can help you greatly in this matter. Plus, borrowing a loan from such people comes without any interest or charges. It would be even better if a family member would pay you money without any terms of repayment. So, it will be a happy moment for them whenever you pay back some money.
On the other hand, you can hire a lawyer to write a written contract about the loan and its terms if your family members are quite serious about getting it back.
Get Money From Your Insurance Policy
Some insurance companies allow the policyholders to take a loan against their insurance. The best part is that you won’t have to repay the loan, but your children will get less insurance money than usual.
If your insurance doesn’t cover the entire mortgage cost, your future premiums will go towards paying the loan installments. You can directly talk to your insurance company about the terms they offer for getting a loan from the insurance policy.
Put Your House on Rent
If you don’t have enough money to repay the installments, choosing a house you can offer for rent is better. Double-story houses are a good option; you only need to pay for maintenance. You might get enough money from the rent to pay the mortgage installments. However, you must pay a substantial down payment first so the lender won’t have issues offering you the mortgage.
Final Words: What’s The Ideal Credit Score To Buy A House?
A mortgage is a considerable sum of money you get from a lender, which is why a good credit score is essential. So, if you wonder what is a good credit score to buy a house, we answer it in our article with details.
Typically, with a credit score above 640 and a good credit history, especially the repayment history, lenders feel secure while offering you a loan. They know that you’ll pay the installments on time, so they are fine offering the loan at low-interest rates and flexible terms. However, remember that your credit score is not the only thing that matters while getting a mortgage.