Welcome to our Debunking Real Estate Myths series. For our first topic, we will discuss Credit Score and how good it should be to get your mortgage approval to buy a house. There is a lot of misconception about Credit Score and we are here to help you understand more about Credit scores.
But what is a Credit Score? A credit score determines a consumer’s creditworthiness. The credit score is from 300 – 850. The higher the credit score, the better chance your real estate mortgage loan will get approved. Lenders use this to evaluate a person’s capability to pay the loan within the agreed timeline.
Fair Isaac Corporation (also known as FICO) created the credit score model which is used by Financial Institutions. Although there are other credit scoring systems being used, the FICO score is the most commonly used by financial institutions.
What is the FICO score range often used by financial Institutions?
Excellent FICO score would range from 800 – 850, Very good FICO score would be from 740 – 799, Good FICO score would be from 670 – 739, Fair FICO score would be from 580 – 669, and Bad FICO would be from 300 – 579
So do you need a perfect credit score to buy a house?
The answer is No! In fact, you can get a mortgage approved even if you’re credit score is below 800.
Although it is Ideal to have a credit score in the excellent range to get approved for a mortgage, you can get a mortgage loan approved even if your credit score is within the good or very good range. Different types of loans have minimum credit score requirements. What are the types of mortgage loans? Let’s break it down for you.
Conventional loan
Conventional mortgage loans are from a private lender and are not insured by any government agency. Most lenders would require a buyer to have a very good or excellent FICO score to get approved. But there are some lenders that require only a minimum of 620 FICO score. But keep in mind that the interest rate, and down payment amount might be higher if you have a lower credit score.
FHA Loan
FHA mortgage loans are less risky for lenders as this is easier to qualify compared to conventional loans. These are also insured by the Federal Housing Administration (FHA).
Normally you would need a FICO score of 580 to qualify for an FHA loan that requires the buyer to make a down payment of 3.5%. For those who would pay a down payment of 10% or more, there is no standard minimum FICO required. However since FHA loans would originate from private lenders, they would set the minimum FICO score requirement to apply for a mortgage.
VA Loan
VA mortgage loans don’t require any down payment, and borrowers can get approved with a lower credit score. These are insured by the U.S. Department of Veterans. But there is a catch. There are certain requirements to be considered for approval
To qualify, a borrower must be a veteran or a member of the U.S. Military, U.S. Military Reserves, or the National Guard. Spouses of military members who died during active duty or were disabled during their service can also apply for the VA loan.
Just like FHA loans, VA loans are originating from lenders. Although the Department of Veteran Affairs does not have minimum credit score requirements, lenders have their own minimum FICO score to qualify.
Closing
Aside from Credit score, Real Estate mortgage lenders also consider other factors such as income, debt-to-income ratio, down payment, savings, and employment history.
You don’t need a perfect credit score to get approved for a real estate mortgage loan; however, you would need to have at least a fair FICO score. So does that mean you can buy a home if you have a bad credit score? Don’t lose hope. You can still get a mortgage loan with a bad credit score. However, it would be more difficult. Lenders can charge a higher interest rate or set a bigger down payment.
