What credit score do you need to buy a home? – The Madison Leader Gazette

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Getting a mortgage is a little easier now as lenders are starting to relax borrowing standards that have excluded many pandemic-stricken buyers. But easier doesn’t mean easy, and you’ll still need the best possible credit score to avoid further scrutiny from your lender.

A conventional mortgage usually requires a minimum credit score of 620, but you may be able to get government guaranteed loans with a score as low as 500.

Generally, the higher the credit score, the better the interest rate. Nonetheless, lenders can impose their own credit requirements, which means your credit score should be in good condition before you buy.

[Read: Best Mortgage Lenders.]

What is the minimum credit score for a mortgage loan?

The minimum credit score for a mortgage depends on the type of loan – conventional or government backed – and the lender. You won’t find a universal credit score for mortgages.

“While it ultimately depends on the loan, the minimum credit score for a mortgage loan typically ranges from 580 to 620,” says Gina McKague, founder of McKague Financial. “Different types of loans require different minimum credit scores. “

You can choose between conventional or government guaranteed loans, which are insured by the Department of Agriculture, the Department of Veterans Affairs, or the Federal Housing Administration. The government guarantee protects the lender in the event of your mortgage default, which means you could qualify for a government guaranteed loan more easily than a conventional loan.

If you are looking for a mortgage, this table shows the minimum credit score requirements for FHA, VA, USDA, and conventional loans.

Type of loan

Minimum FICO credit score

Made for

FHA

580 with a deposit of 3.5%; 500 with 10% down

Low- and moderate-income homebuyers

Virginia

No defined minimum; most lenders require at least a credit score of 620, but some will allow a score as low as 580

Veterans Buying Houses

USDA

No minimum set, but a score of at least 640 is recommended

Qualified buyers purchasing homes in designated rural areas

Conventional

620 to 640

Buyers looking for traditional mortgages

If you want a jumbo mortgage, which exceeds the government loan limits for mortgages guaranteed by Freddie Mac and Fannie Mae, lenders will expect a credit score of at least 680. In most states, a jumbo loan is a mortgage loan over $ 548,250.

Many lenders require FICO scores of at least 700 for jumbo loans on single-unit properties, but VA borrowers can get them with credit scores of at least 640.

[Read: Best FHA Loans.]

Can You Qualify For A Mortgage With Bad Credit?

A bad credit score won’t be a barrier to approval, but it often means paying more than if you had good credit.

Typically, lenders view a credit score as a leading indicator of the likelihood that a borrower will repay a loan, says Glenn Brunker, president of Ally Home, a division of Ally Bank.

The lender, “accordingly, will ask a borrower with a lower credit rating to pay a higher rate, all other things being equal,” Brunker said.

Even a small difference in your interest rate can add up to thousands of dollars over time. A loan of $ 250,000 over 30 years at an interest rate of 4% earns $ 179,674 in total interest; a quarter of a percentage point more costs an additional $ 13,072 in total interest.

The higher interest rate also translates into a higher monthly payment: you would pay $ 1,194 at 4% and $ 1,230 at 4.25%.

What other factors do mortgage lenders take into account?

A good credit score alone won’t make you a lock on a home loan. Yes, lenders take credit into account when you apply for a home loan but also take your:

– Employment history and income.

– Advance payment.

– Tax declarations for the last two years.

– Savings and investment accounts.

– Profits and losses, if you own a business.

– The debt-to-income ratio, a measure of the share of your income spent on debt repayment each month.

– Negative credit history, including defaults, write-offs or bankruptcies.

[Read: Best Mortgage Refinance Lenders.]

How Can You Increase Your Credit Score To Buy A Home?

If you are concerned that your credit rating is affecting your mortgage eligibility and interest rate, you can try increasing your rating. Start by extracting your credit report from AnnualCreditReport.com.

“Make sure there aren’t any credit report errors on your credit report,” McKague says. “If there are any errors, be sure to contact the credit companies and correct the errors.”

Then take these steps to improve your credit score before you apply for a home loan:

– Limit new credit requests to a window of three to six months before you buy, as serious credit requests can take a few points off your score.

– Pay your bills on time and use sender or calendar alerts to track payment due dates. Payment history represents 35% of your FICO score and is the most important factor that influences it.

– Pay off your credit card balance if you are in debt. Using too much of your available credit or having a balance can indicate that you are overloaded and adversely affect your credit score.

– Keep old accounts open to demonstrate a strong credit history and to improve your credit utilization rate. Closing a card reduces your available credit, which can increase this ratio, a major factor in your credit score.

– Expect to write letters of explanation for negative items on your credit reports.

Allow as much time as possible to work on improving your credit score: ideally six months to a year before you start shopping for a loan.

“Don’t wait until the last minute, when you might end up losing your dream home, a home you’ve already moved into mentally,” Brunker says.


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