One of the major life events and large financial commitments that should be carefully considered is buying a house. The applicant's FICO score may maybe the most crucial aspect among all the factors taken into account in the appraisal of a mortgage application. However, what FICO credit score is minimally needed to get approved for a mortgage and buy a house?
Ninety percent of American lenders use the FICO scoring algorithm to assess credit risk and approve individuals for loans. FICO scores go from 300 to 850; the score is better the closer it is to the later number. Lenders see a credit score of more than 760 as excellent; a score of less than 580 is either mediocre or negative.
What FICO Credit Score is Required to Qualify for a Mortgage
Traditional employment-based mortgages require at least a FICO score of 620 to qualify for a home loan. FHA loans can be obtained from the Federal Housing Administration with credit scores between 580-619 but the required down payment is 3. 5% at least. The VA loans offered by the Department of Veterans Affairs also have minimum scores between 580 and 620. If the score is less than 580 it becomes relatively hard to qualify for a mortgage for purchasing a home unless one is willing to put a lot of money as a down payment or find a guarantor with a good score.
What Credit Score is Needed to Obtain a Mortgage?
Although it is possible to get approved for a home loan with a credit score of 580, it is recommended to have a credit score of 760 or above when applying for a home loan. People with excellent credit standing with a FICO score of 760 to 850 are considered to have a very good credit status by lenders, and hence they are offered the best rates that include lower costs of borrowing about the general expenses of homeownership. They are considered to possess lower credit risk and this makes them easily access credit from the lenders.
The best credit score clients are those who have access to all the mortgage products, choices, and higher loan sizes compared to their income. They also fall under the category of individuals who are offered the lowest interest rates. This is especially so because even a very small percentage rate difference in the home loan significantly affects the affordability of homes.
find out the reasons why your credit score is important when it comes to getting a mortgage.
There are a few key reasons why your credit score and credit history hold significant importance in securing a home loan:
- In some situations, it proves that you have the capacity and willingness to repay debts in the past. This past track record is used by lenders to determine the possibility of loaning money to finance a mortgage.
- It provides information on aspects of loan approval, including minimum credit score levels that conventional lenders and government bodies may establish. It is important to note that programs can have varying credit requirements that dictate whether one is qualified for a program or not.
- The higher the score, the better the chances when it comes to approval and more importantly that come with homeownership such as lower interest rates on mortgages and down payments.
Ways to Boost Your Credit Score to Purchase a House
In case your current credit score is slightly below the good home loan qualification, it is high time to start working towards increasing it. Here are practical tips to improve your FICO score:
- Check copies of credit reports prepared by the three major credit bureaus for any information that may be lowering your score. Dispute any incorrect information.
- Ensure all bills such as credit cards, auto loans, etc are paid on time every month. Credit payment history represents one of the largest subsets of FICO calculations.
- Reduce the utilization of credit card balances to below 30% of the credit limit. Closely related to the above, high utilization hurts credit.
- Restrict the number of credit applications that might reduce the score in the short run. This can mean higher risk even if approved too many can mean higher risk can mean higher risk can mean higher risk can mean higher risk can mean higher risk even if approved
- Permit time for change to beat your score up. FICO formulas use history over time up to 2 years.
Seeing the perfect FICO score that lenders prefer makes it easier to get a home loan approval. Keeping track of credit scores 12-18 months in advance provides enough time to build a solid financial base to make homeownership possible. Make follow-up visits often as you build for a downpayment and financially prepare for this huge responsibility.
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