Home buyers, including those who are not financially savvy, understand that a good credit score is key to getting a mortgage. The question is, what is a good credit score to get you a home?
Currently, lenders are lowering the standards for borrowing, allowing more people than before to get a mortgage. This does not mean that getting a mortgage is easy; you still need a good score to not only qualify but also to avoid unnecessary scrutiny from the lender.
By and large, the credit score you need is determined by your credit history up to the point of making the mortgage application. As a general rule, a high credit score attracts a better interest rate. So, before you shop for a mortgage, ensure your score is rated “good” or “excellent”.
This post seeks to shed more light on the minimum credit score requirement, variations based on the type of mortgage, where your score falls, and how it impacts your mortgage application.
What’s the minimum credit score requirement for mortgages?
There are no universal credit score limits for getting a mortgage. The lender and the type of loan are the key considerations for the minimum requirement.
Going by rates from different lenders in the industry, the minimum credit score requirement for a mortgage falls between 580 and 700. For fair terms though, the score falls between 650 and 700, with excellent scores above 750 getting you the best loan terms.
However, if you have low credit scores you can still own a home. Subject to qualification, you can go for conventional loans, government-backed loans, and mortgage grants programs.
Credit score variation by loan type
- With a credit score between 620 and 640, you qualify for a conventional loan which is designed for borrowers in need of traditional mortgages.
- If your credit score falls between 500 and 580, you qualify for the Federal Housing Administration (FHA) loan, which is designed for low to moderate income home buyers.
- The government has not set a minimum credit score for Department of Veteran Affairs (VA) loans for veterans buying homes and the U.S. Department of Agriculture (USDA) loans for qualified borrowers buying homes in designated rural areas.
- For both VA and USDA loans, lenders choose their own credit scores ranging from 600 to 640. Most lenders consider credit scores around or above 700 for Jumbo loans.
How a bad credit score affects your mortgage
A credit score is an important indicator that lenders use to assess the borrower’s ability to repay the loan. That said, iIt is possible to get a mortgage approval with a bad credit score. However, this often means the mortgage will be costly.
Low credit scores attract higher interest rates translating to a higher monthly instalment. This results in an expensive mortgage in the long run.
What factors do mortgage lenders consider?
A good credit score is important to secure mortgage finance but it is not the only consideration made by the lender.
Banks and other lenders also consider your income, tax returns, deposits, investments and savings. Additionally, if you own a business, lenders consider your profit and loss accounts.
They also analyse your debt-to-income ratio to measure how you spend your income towards servicing your debts on a monthly basis.
Lastly, lenders are likely to be persuaded against financing your mortgage if you have a negative credit history including delinquencies, and bankruptcies.
Conclusion: How to Strengthen Your Credit Score
Although a high or a flawless credit score is not a mandatory requirement for getting a mortgage, a good credit score increases your options to get the house you envision. So, before approaching a lender as a home buyer, it is important to boost your credit score.
Start by checking your credit score and reviewing your credit history annually. Next,
ensure that you pay your bills in a timely manner to boost your score; this is the most important measure of creditworthiness accounting for 35% of your credit score.
You should also maintain your credit utilisation rate below 30% and for the short period before your mortgage application, avoid opening new or closing existing credit lines to maintain your credit score.