Credit scores plays a very important role in getting a good home loan with favorable rates. There are official and unofficial guidelines for determining how credit scores will affect an applicant’s eligibility. Lenders use your FICO credit score to determine the minimum down payment percentage you have to make in order to get a home loan. This makes your credit report the most important factor to consider when seeking a home loan. Let’s dig deep into the credit scores for home loans.
It is very important to understand the different kinds of loans available so you can have a better idea of which one will suit your needs better. The most common type of home loan, is the fixed rate mortgage. As the name suggests, with the fixed rate mortgage, you are fairly certain of the amount you will be paying every month because the interest rates stay the same for the life of the loan. The disadvantage that you are likely to experience with this type of mortgage is that you may pay more interest than other home owners during a low interest period. In my opinion though stick with the fixed rate mortgage so you’re not surprised down the road.
How your credit score affects your mortgage
To qualify for a mortgage, you will need to produce documents that show proof of income, credit history, a summary of monthly expenses and assets and liabilities. All of these documents are important to the lender so that they can determine whether or not you are a good candidate for the loan you want. In addition to these documents, lenders will look at your credit report to determine your eligibility for a home loan.
For government backed mortgages, the FHA, VA and USDA require lenders to review the entire loan profile of an applicant before making an underwriting determination. There are no minimum credit score requirements but several factors can make an applicant ineligible.
For example, an applicant typically with more than one 30 day late payment in 12 month period or has filed for bankruptcy within the last 36 months is ineligible for a government backed mortgage. Other factors include late rent payments, having accounts that have been converted into collections in the past year and having outstanding collection accounts with no payment arrangements.
Credit scores for home loans
So, the question you probably have on your mind right now is: What are the minimum credit scores for home loans?
Your FICO score will not only affect the type of loan you can get but also the down payment you have to make in order to be eligible for the home loan. Before you look at the official FHA loan requirements, you need to understand the credit report that lenders use when determining your eligibility. Most people often just use one of the three biggest credit bureaus to get their credit report. Lenders on the other hand use a tri-merge report that they get from all of the three bureaus. If there are 3 credit scores, the middle one will be the representative score and hence what the lender will use to determine your eligibility and down payment.
There are official FHA loan requirements that are set by federal law. They outline how your credit score affects your home loan. Applicants with a FICO score of at least 500 are eligible for a home loan. An applicant with a credit score of 500-579 is required to make a down payment of at least 10% and those with scores higher than 579 will only be required to make a down payment of 3.5%.
Improve Your Credit Scores
Based on the information we’ve covered so far it makes a lot of sense to clean up your credit history before you apply for a home loan. The following steps should help you do just that.
- Check all the information to make sure that everything on the credit report is accurate.
- Eliminate any discrepancies you find as they could hurt your chances of having a favorable credit score.
- Pay off all the existing balances on any loans you may currently have. These one-off payments can be very effective in raising your credit score
- Try to keep your debt below 30% of your credit limit. This is a good way to keep your credit score up.
Depending on who you talk to or the mortgage product you’re referring to, credit scores for home loans can vary. I know a lot of this information is quite redundant for a lot of you out there. But remember this; we have a lot of young up and comers that sooner or later will be looking at buying a home. If we can teach and educate young people on the proper and most productive way to buy a home then that will hopefully make for a stronger economy. More importantly maybe that will assist in helping our children and our children’s children to never have to go through a housing crisis as we did just a few years ago.