August 5th, 2017 8:43 AM by Jackie A. Graves, President
If you’re looking
into buying a house but your credit is poor.
The first thing you
need to do is check your credit score.
So what credit score
is needed to buy a house?
The answer is, it
In this article we
will cover the minimum
credit scores needed for different types of mortgages
We will also go over
some things you can do now to increase your credit score.
Check your Scores for Free
The first thing you
need to do before applying for a mortgage loan is to check your FICO score.
There are a few
reputable websites that give you all three credit reports and scores
absolutely free. These companies even have an app that will alert you when
something on your credit profile changes.
Credit Score Needed to Buy a Home in 2017
FHA Credit Score
Your FICO score is the first thing a mortgage
lender will check when seeing if you qualify for a loan. While there are many
factors involved in qualifying for a loan, your credit score is the most
important. The minimum credit score you need to purchase a
home will depend on the type of home loan you qualify for.
Before the 2007-2008
housing market crash, it was much easier for people with poor credit to find
subprime loans. Lenders were not as heavily regulated as they are today.
2010, Obama signed the Dodd-Frank Wall Street reform into law. This law
tighten up the requirements in the mortgage industry and made it more difficult
to qualify for a loan. Especially people with low credit scores.
Minimum Credit Score Required for a Mortgage
If you have a poor
credit rating the best home loan to get is an FHA loan. FHA loans have the
lowest credit requirements of any mortgage, often referred to as bad credit home
loans. In order for the FHA to insure a mortgage loan the borrower
must have at least a 500 credit score with a 10% down payment.
approved for an FHA home loan with a credit score in the 500-579 range is very
difficult, even with 10% or more down. It’s highly recommended you follow the
advice in this article to improve your credit before applying for a mortgage.
If you have a 580 or
higher FICO score you will just need a 3.5% down payment. Getting approved for
an FHA mortgage with a 580+ score is much more likely than if your score was
Typical minimum FICO scores by
FHA Loan – 580+ credit
score (500-579 score is possible but unlikely)
– 620+ credit score (some lenders require 580)
USDA Loan – 640+
FHA 203K Loan – 620+ credit
Loan – 620+ credit score
Speak to lenders
about getting pre-approved for a home loan
What is an FHA loan?
FHA loans are backed
by the Federal Housing
Administration. The FHA does not issue the loans, they insure them in case
the borrower defaults on the loan. This reduces the risk for the lender
allowing them to reduce the credit score needed to buy a house.
The Federal Housing
Administration will back a loan if the borrower has at least a 500 credit score
and a 10% down payment. However, it is very rare to get approved for an FHA
loan with a credit score below 580.
Lenders look at more than just your credit
Mortgage lenders are
becoming better at finding out about the borrower's ability to repay a mortgage
because just seeing if you have a good credit score.
One thing that will
help you is if you can show that you have re-established credit and there was
an economic event that caused the bad credit and you have since recovered from
the financial hardship.
Lenders will also
look at your debt, if you don’t have much debt this is a strong compensating
factor for bad credit. Compensating factors are factors that reduce the lenders
risk, allowing them to approve borrowers with low credit scores.
will also want to see recent solid payment history with no late payments or
collection accounts in the past 12 months. A low debt-to-income ratio and solid
Compensating Factors for Bad Credit
ratio (High down payment 10%+)
Large amount of money
history with current employer
Credit Score Ranges
There are three major
credit reporting agencies in the U.S. TransUnion,
Experian and Equifax. All three bureaus grade your credit
history on a range from 350-850.
Your score will be
different from each credit bureau because not all creditors will report to all
A 700 credit
score is generally considered good by many lending institutions. Poor credit
scores are generally any score below 620.
Credit Score Range
500-579 = Bad
580-619 = Poor credit
620-679 = Fair credit
Average credit score
740 and higher =
Great credit score
Your credit score will affect your interest
Your credit score
will affect the interest rate you get. Poor credit scores often lead to higher
mortgage rates and a higher monthly payment. Obviously the higher your credit
score the lower you rate will be.
579 and lower –
If you are approved for a mortgage with this low of a score you will have a
credit score as much as 2% higher than the current lowest rate.
580-619 – You can
expect an interest rate as much as 1% higher than the lowest rates available.
620-679 – With a
credit score in this range your interest rate will be slightly affected. Rates
could be .5% higher than someone with great credit will receive.
680-739 – This is the
range most homebuyers are at, your rate will not be affected much at all in
740 and higher – You
will be offered the best rates mortgage companies have to offer.
Tips to increase your credit score quickly
your credit card balances
utilization ratio is the percentage of credit you are using on your credit card
accounts. Credit utilization ratios account for 30% of your credit score.
The higher balance
you have on your credit cards, the lower your credit score will be. Make sure
to pay your credit card balances as low as possible before applying for a
Of you have any
collections on your credit report, they are obviously having a significant
negative impact on your credit score. You can contact the collection agencies
directly and ask them if they will do a pay for delete.
A pay for delete is
an agreement that you agree to pay the balance and in return the creditor
agrees to remove the account from your credit report. If a creditor will not
agree to this, there is no reason to pay off collections unless your lender
tells you to. Paying
collection accounts does not improve your credit score.
an Authorized User
If you have a family
member or close friend with a credit card. They can add you as an authorized
user on their account. The entire credit history of the account will be
added to your credit report.
FICO does consider
authorized user accounts into their credit scoring algorithm. This is a quick
way to add up to 30 points to your FICO score.
credit score do you need to purchase a home?
FHA loans require 500
FICO score with 10% down and at least a 580 credit score with 3.5% down.
I get a house with low credit scores?
Depending on how bad
your credit is, you just need a 580 credit score to buy a house. Credit scores
between 580-620 are often considered poor, but it may be enough for you to get
home loans only come with a fixed-rate mortgage?
FHA loans come with a
fixed-rate or an adjustable rate. However, the most common mortgage terms
for an FHA mortgage is a 15 year or a 30 year fixed rate.
mortgages for first-time homebuyers only?
No. While they’re FHA
mortgages are great for the first-time homebuyer. FHA financing is
available to all home buyers looking to purchase a house as their primary
residence. Investment properties do not qualify.
There is no limit to
how many times you can get an FHA home loan. You will to sell your
house if it has an FHA loan on it before you can apply for another FHA
I increase my credit score so I can get a home loan?
To improve your
credit score quickly you can pay the balances on your credit cards as low as
possible. The lower your credit card balances are, the higher your credit score
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