WHATS THE LOWEST CREDIT SCORE I NEED FOR PURCHASING A HOME
WHATS THE LOWEST CREDIT SCORE I NEED FOR PURCHASING A HOME
Many things factor into getting a mortgage, but it all starts with your credit score and your credit history. If your credit score isn’t up to snuff, nothing else matters. Credit.com spoke with a handful of seasoned mortgage lending experts to find out what credit score you need to get your foot in the door of your dream home.
Why Your Credit Score Matters
“The primary function of the credit score is that it’s used in pricing the mortgage loan,” Joe Parsons, branch manager of Caliber Home Loans, in Dublin, Calif., said. That’s because mortgage lenders use what’s known as a risk-based pricing matrix, or table, to determine the interest rate of your loan based on this data.
What’s the Lowest Score I Need for an FHA Loan?
The credit score home loan scale that is most often used is 300 to 850. The Federal Housing Administration (FHA) will allow a borrower with a 500 score to secure a loan, Parsons said. However, there is no guarantee that a lender would help make that happen, even with a 10% down payment.
A 600-credit score isn’t a high score, either, but that’s generally considered the minimum credit score for an FHA-backed loan, Scott Sheldon, a senior loan officer with Sonoma County Mortgages, in Petaluma, California, said. (For the unfamiliar, FHA loans are popular among first-time homebuyers and require a minimum down payment of 3.5%.) These minimum credit scores for a home loan may get your foot in the door, but your goal should be to work on improving them.
Heather McRae, a senior loan officer for Chicago Financial Services, said 580 is the lowest score she’s seen in recent loan approvals, and she hasn’t seen anything lower than that in a long time. According to Parsons, an applicant with a 580 score, would “have to have a bunch of bad stuff on their credit report: some combination of maxed-out credit cards, late payments, possibly judgments from small claims court, and possibly tax liens. Those elements are typically an indication that the person does not have control of their personal finances.”
If this describes your situation, “you are going to have a lot — I mean, a lot — of hoops to jump through,” Sheldon warned.
And the lender may be wary of working with you, Parsons said. “The way I tend to think about it is, even if I can do the loan, I’m not really doing them a favor by getting them into that obligation. You have to get your house in order to do yourself some good, from a financing standpoint.”
What is a Loan-to-Value Ratio?
A loan-to-value ratio is a financial term that is often used to describe the ratio of a loan to the value of the asset that is being purchased with the mortgage loan. To calculate the loan-to-value ratio, you would take the amount of the mortgage lien and divide it by the overall appraised value of the property being purchased and then express this value as a percentage.
The loan-to-value ratio is important to a mortgage lender because the higher your loan-to-value ratio is, the lower your home equity is. A home that is showing a lower equity comes up as a red flag to mortgage lenders as a high risk because the borrower may end up defaulting on the mortgage loan. To pose less of a risk to a mortgage lender, the loan-to-value ratio needs to be under 80%.
What’s the Lowest Score I Need for a Conventional Loan?
Conventional loans, which require borrowers to make a 5% down payment, have higher credit score home loan standards, Parsons said. With these, the minimum credit score required is 620 — typically what you’d see on a credit report due to a combination of high credit card balances(i.e., using more than 30% of your available credit limit) and scattered late payments. “Any lender will make a loan to somebody with a 620-credit score,” Parsons said, but for applicants “it may not be a total walk in the park and they’ll need to provide documentation” of income and assets.
The Optimal Score for Securing a Mortgage
With all these minimum credit score home loan requirements, you may be wondering what credit score lenders like to see. According to Parsons, that number is 740 or higher.
Sheldon called 680 the unofficial minimum, saying that’s “the credit score to strive for if you want to have choice and flexibility.” If you are already close to 680, he said to aim higher for better loan terms. “You really want your score in the 740 range to get optimal pricing on any given day.”
With conventional mortgages, in particular, Parsons said, “a score at 740 or higher is the score needed to get the best rate in that risk-based pricing matrix.”
Tricks for Improving Your Credit Score
If you are thinking of buying a home, you will want to prepare for the mortgage process now by building your credit the smart way. Doing so can take some time, especially if you have had problems with your credit in the past. However, if you start now, you are more likely to get yourself in a better position to buy the home of your dreams.
To begin improving your scores, Parsons recommends paying down any revolving debt, or debt you have been carrying on a line of credit for more than one pay period. “That could well be costing you 15 points on your score,” he said, so it’s worthwhile to review your balances now and take steps to reduce them accordingly.
Beyond that, be sure to take care of any recent collection accounts for late payments, which could easily drag down your scores, Parsons said.
If you have yet to review your credit report — which you can pull for free, annually, by visiting AnnualCreditReport.com — consider doing so now. Go through it with a fine-toothed comb, looking for any errors that may warrant correction, and see what needs to improve. (Find problems and need to craft a dispute letter? This guide can help you get started.)
You may find old tax liens or judgments that require following up, or perhaps learn there’s nothing to worry about. Either way, you will want to know so your homebuying process can go as smoothly as possible.
Ultimately, the lender is going to be looking to see if you will be able to make the payments on the mortgage loan without any problems. The mortgage lender will also be able to tell you what their minimum credit score for a home loan is and if there is anything you can do to help improve your current credit history.
The Challenges of Securing a Home Loan
As previously mentioned, there are a lot of numbers involved when it comes to home loans. Some big challenges a potential homeowner may face include the high cost of properties and the high cost of the deposit or down payment that they will have to use on the property.
It is important that you maintain good and outstanding credit, save what you can for the deposit, and make sure you are working on wiping away any outstanding debt you may have accumulated. By following these simple steps, you will have better luck when it comes to securing a home loan for your dream property.
Instead of just shooting for the minimum credit score that is required for a home loan, you should work to raise your credit even further to get an even better deal when it comes to interest and payments.
The Future of Home Loans
Currently, the housing market within the United States is quiet but that does not mean we can expect shifts later on that can further impact the house buying process. One of the biggest decisions anyone will make would be choosing the best home loan mortgage and mortgage lender for them, and this is especially true for first-time homebuyers who may need a bit more help than those seasoned veterans of the home buying experience.
The rise of technology has also affected many different industries, including real estate. These changes in technology are also making buying a home a more digital experience than before because many of the traditional tasks such as finding and hiring a real estate agent are now being replaced with online apps such as Zillow to help them.
Now several of the documents and paperwork required for a home loan can be done online, and it requires less person to person interface with the mortgage lender than before. The average approval on a home loan application is also much shorter than before and comes in at around eighteen days, opposed to the previous twenty-seven days in the past.
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Credit report mistakes can lead to disqualification for mortgages and car loans, as well as increased insurance premiums and interest rates. In some cases, those mistakes can even prevent you from getting a job.
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I am a Real Estate Professional with EXIT Midlands Realty in Chapin, South Carolina. I have been assisting clients with purchasing and selling their homes in the Columbia, Irmo, Lexington, Chapin, Newberry areas. Call me with any of your real estate needs or questions at 803-315-1940, or feel free to email me at Melissa@scexit.com.
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