According to Experian’s Annual 2021 Report, only 25% of Americans have “very good” credit scores, most falling behind what would be considered good to great, with nearly 16% of Americans having credit scores considered part of the “poor” category. A good credit score is essential for many facets of life — especially when aspiring to apply for a loan — because it shows lenders the borrower can repay the money on time and is worth trusting with the funds they request.
Similarly, a good credit score plays a part in helping borrowers qualify for various home loans at the best lending rates.
Yet, not everyone knows what a good credit score means, or how it affects borrowing abilities. It’s important to discuss the relationship between FICO scores and home buying, and to shed light on what a good credit score truly is.
What Is a Really Good Credit Score?
Typically ranging from 300 to 850, a credit score is the rate lenders use to determine someone’s creditworthiness and whether they can repay the loan on time.
While the answer to “what is a really good credit score” differs among lenders and depends on the mortgage a homebuyer wants, most lenders prefer a credit score of at least 600 to 700. Still, the higher the credit score, the easier it is to apply for a loan and get better terms. In addition, a higher credit score means higher approval rates and lower interest rates.
To decide how the borrower ranks, the lender must review reports from the three credit reporting bureaus, Equifax, Experian, and TransUnion. Then, the mortgage lender rates the borrower using the average score of the three ratings.
If there’s more than one borrower applying for the same loan, the lowest median score among them becomes their average credit rating in consideration for the loan. However, this may differ between loan types, as well as from one lender to the next. These variances are especially present with conventional loans.
What Credit Score Does a Homebuyer Need to Qualify for a Mortgage? (With Corresponding Loan Types)
The credit score threshold for mortgages varies from one case to the next, depending on the lender’s requirements and the desired loan. Here are some of the credit score requirements for each type of loan.
Credit Score for Conventional Loans
Since no government programs back conventional loans, lenders take precautions to ensure that they work with strictly disciplined borrowers. In other words, conventional loans are the best option for homebuyers with higher credit scores, who are able to pay significant down payments.
Conventional loans require a credit rating of 620, but higher scores lead to better outcomes for a homebuyer. If the borrower doesn’t have a good credit score, conventional lenders will mostly resort to charging higher interest rates, leading to higher monthly disbursements.
Borrowers with higher credit scores don’t have to pay private mortgage insurance (PMI), which requires a homebuyer to pay extra if their down payment is below 20%. For instance, a buyer with a FICO score of 620 and a down payment of 10% will need to pay a PMI of 1.1%, while a 760 credit score will pay 0.30% with the same down payment.
Credit Score for FHA Loans
The Federal Housing Administration insures FHA loans. Best suited for homebuyers with lower credit scores, who are unable to make substantial down payments. These loans permit down payments of as little as 3.5% and a credit score of 580 and above. Still, higher credit scores mean an easier time getting a loan and lower interest rates.
With a FICO rating of 500 to 579, a homebuyer aspiring for FHA loans can secure the mortgage with a 10% down payment. Some lenders may impose additional terms on these loans, thus barring homebuyers with lower credit scores from getting FHA financial aid.
Similarly, the FHA loans accept borrowers with lower credit scores, but lenders will still check all factors in the borrower’s financial situation.
Credit Score Requirements for VA Loans
Credit Scores are also a concern for veterans aspiring to own homes. While veterans can qualify for any loan type (as long as they meet the credit score requirement), they’ll often find the Veteran Affairs (VA) loan the best option.
The Department of Veterans Affairs insures these loans to help active military members, veterans, and their eligible spouses buy a home fairly and affordably.
The VA loans allow qualified borrowers to finance their home purchase entirely without paying for PMI. However, the borrowers will have to pay a one-time funding fee. The amount varies depending on the funding, down payment, military service branch, and how often a homebuyer has chosen VA loans.
For instance, the funding fee is typically 2.3% for first-time VA borrowers with no down payment. On the other hand, a 10% down payment will require a 1.4% funding fee, while veterans with a VA disability rating will pay no funding fee.
The VA loan has no FICO score requirement, but most lenders impose a credit score between 580 and 600 for VA borrowers.
Credit Score for USDA Loans
U.S. Department of Agriculture (USDA) loans have no credit score requirement for their borrowers. However, a lender will most likely set the FICO score requirement for their borrowers. These loans are the best option for homebuyers in rural and suburban neighborhoods whose income is less than 115% of the median income of their residential areas.
While the USDA has no cap for credit scores, a rating of 640 and above is a requirement from many mortgage lenders.
Credit Score Requirements for Jumbo Loans
Jumbo loans are the best option for homebuyers looking for mortgages beyond their conforming loan limits. Of course, considering the risks involved in lending such amounts, a jumbo lender will most likely demand FICO scores of 700 and higher.
How to Boost Credit Score
Building and maintaining credit health may take time, but the commitment is worth every moment spent. Here are the steps to consider:
- Pay all outstanding debts.
- Pay all bills on time to get a good credit history.
- Check and correct all credit score errors.
- Ensure all credit cards are open.
- Limit the urge to apply for additional credits.
- Keep the credit card balances at a minimum.
What Other Considerations Do Lenders Take Before Approving Home Loans?
Besides checking the credit score, banks exhaust all available information to help them identify a borrower’s creditworthiness. A full financial situation helps these lenders determine if the borrower can afford the loan and their likelihood of paying it back on time. Some of these considerations include:
- Debt-to-income ratio
- Loan-to-value ratio
- Income and asset portfolio
What Is a Really Good Credit Score When Buying a Home?
Many homebuyers are worried about their credit scores, especially when buying their first homes. While the numbers may differ depending on the loan type and lender, a FICO rating of 600 and above will be enough for most loans.
Also, having a low credit score doesn’t mean the homebuyer can’t afford a home altogether. Another option is getting a co-signer to combine your scores for a better chance of approval- otherwise, several mortgage lenders offer high-risk loans to borrowers with low credit scores. However, the disadvantage of these loans is that they’re not insured, attract higher interest rates, and come with stricter terms of service.
Information is the power that every aspiring homebuyer requires to live their American Dream successfully. Brokers are Better has an excellent hub for helpful information on real estate and can connect you directly with brokers and mortgage experts to pursue the mortgage that works best for your current credit score.