After months of saving for your deposit, comparing properties, and planning for the perfect housewarming party, now it’s time to secure your mortgage. It’s time to find out what credit score you need to buy your dream home. However, to get that mortgage loan, you need to impress banks with a good credit rating. Although it’s not clear about the minimum amount you need to secure a loan, the higher your credit score the better chances you have of getting a good mortgage deal.
Below are some insights about credit score ratings and how they can affect your dreams to buy a home.
What Is a Credit Score Rating?
A credit score rating is an evaluation of your credit risk that is meant to help banks and credit lenders predict your ability to pay back the debt or default. There are several types of credit scores used in the U.S. These include FICO, Vantage, CE, and educational credit scores. In the U.S., 90% of the lenders use the FICO credit score models to rate their consumers.
In most states, an excellent credit score should be between 662 and 730. According to Experian, the average Vantage credit score in 2020 was 703, while the FICO score was 706. This is considered a good rating since it is above the required 700 score. The higher your score, the better your chances of getting a loan. However, credit score ratings vary from state to state. Therefore, you should research to find the right credit score rating in your domicile state to get a loan to buy your home.
Does a Higher Credit Score Guarantee a Better Loan?
Although most lenders use credit scores as an underlying factor when giving out loans, they have different credit score requirements to offer you a loan. The kind of home that you wish to buy will also determine the minimum credit score that lenders will ask for.
There are several minimum FICO credit scores offered depending on the type of mortgage. FHA loans require you to have a minimum of a 580 credit score. VA and conventional loans require more than a 620 credit score, while USDA loans need more than 640 credit score. However, there are varying requirements for each loan type that may make one more suitable than the other.
Before you start your search for your dream house, it’s good to find out about the requirements for every mortgage type. To improve your credit score, make the necessary deposit payments and clear any outstanding debts. This will elevate your score before you decide to settle down to apply for a mortgage.
What Credit Score Is Good Enough to Buy You a Home?
Today, the minimum required FICO score to buy a home in the U.S. varies based on the economy, housing market, and several other factors. However, by following the basic guidelines for each mortgage type, you can easily figure out if you are eligible for a loan.
Let’s look at each loan type to find out the minimum credit score requirements to get you a house.
Conventional loans have the least lending standards. With a 620 credit score, you can acquire a loan to buy a dream home. However, you need to pay a minimum deposit of 5%. At times, lenders and banks can increase your deposit limit based on your credit score.
The FHA mortgage type is normally backed by the Federal Housing Administration. You ought to have a minimum credit score of 580 to qualify for this loan. Most banks and lenders will request for a 3.5% down payment, but you can also get a loan with a 500 credit score and a 10% down payment. In this case, different banks will take multiple caution procedures to reduce defaulting risk. These include demanding housing insurance and increasing the minimum down payment.
USDA and VA Loans
In most cases, there is no minimum credit score requirement for veterans and qualified buyers looking to buy a home in designated rural areas. Some lenders will request a minimum of 620 from veterans to give the loan, but others have gone as low as 580 previously. USDA loans may go as low as 640.
Average Credit Score
On average, therefore, you’ll need about 680-739 credit score to buy a home. However, if you have a credit score of 740 and higher, you can qualify for the lowest mortgage rates. In most cases, though, lenders don’t just look at your credit score rating to give you a loan. There are several factors that they have to put into perspective.
What Do Banks Look for Before Approving a Home Loan?
As any lender cautious about their money, banks need to be sure that you have the capability to pay loans. So, they won’t just look at your credit score. There are other underlying factors that can help them assess your liability risk.
Here are some of the most common things that they look at:
Your Credit Score
Your credit score is the most crucial factor that banks consider before lending you a loan. Most will require a range of between 680 and 850. It provides a better credit history and your diligence with finances.
Your income can also be a determining factor to get a home loan. Banks normally consider other sources on your monthly income, like salary bonuses and dividends as well. If most of your expenses are catered for, then banks are more likely to approve your loan as your finances are not stretched
If you are servicing an existing long-term loan or other payments like school loans, it may be a challenge for you to get bank loans, as those other commitments can hinder your repaying process. It might be a burden to a client to handle several financial expense commitments.
Making a Percentage of Down Payment
If you are willing to make a down payment of 20%, the bank will definitely consider you as a potential buyer and give you a home loan. It shows commitment, capability, and the sheer desire to achieve your dream.
The commitment fee attracts a government insurance program that allows you to pay less upfront. The Federal Housing Administration (FHA) can provide the borrower loan for a smaller percentage as long as you pay mortgage insurance.
Do you have a dream to own your own home? Your dream is valid and achievable. Simply approach your bankers and lenders to help you learn about your credit score and things you need to achieve your dream.