Good credit scores still needed to obtain great mortgage rates

Before a new home buyer, especially a first time home buyer, starts looking at homes, they need to obtain a pre-approval for a mortgage.   This is necessary so the buyer will know what price range they should be considering, but is also required so the buyers and the sellers will know what type of loan will be used for the transaction.  Different loans have different underwriting requirements and may mean certain home repairs will be necessary prior to the sale, or may mean there will be a longer timeframe required to get to closing.  

credit scoreOne of the most critical components of getting a mortgage at great mortgage rates with no or limited points, is to have good credit scores.  The better the scores, the more choices a borrower has in terms of what types of loans they can utilize, what rates they will get, how much of a down payment they will need, and what they might pay in terms of points.

FHA Credit Score Requirements

Currently, the Federal Housing Administration (FHA) allows borrowers to put down only 3.5%, even if their credit score is below 700.   The FHA rules indicate that borrowers with credit scores of 500 or above are eligible for FHA funding.  However, a Lending Tree article indicates that a full third of the FHA loans they approve have credit scores of 720 or better, while 63% are between 620 and 719.  A mere 4% of loans they approve fall below 620, which means that even though a credit score of 500 is all that is needed for an FHA loan, the requirements for those with low scores knock most of those buyers out of the picture (lower scores mean higher monthly payments, larger down payments, higher income requirements, to name a few requirements).

USDA Credit Score Requirements

FHA isn’t the only type of mortgage that is available to those with lower credit scores.  For a USDA mortgage, which can provide up to 100% of the purchase price in specific geographical rural areas, there is no minimum credit score required.  Not officially anyway, but if your score is below 640, you’d need to provide documentation on why it is low, and getting approved for the loan could be more difficult if not impossible.

Conventional Loan Credit Score Requirements

Credit scores associated with conventional loans could go as low at 620, but interest rates will be higher at those lower scores.  A borrower with a 620 rate might also need to have at least 20% of the home’s purchase price available as a down payment.  Many providers of conventional loans will require a credit score of at least 660 or possibly 700 in order to qualify the borrower.

Bottom Line

If you want to buy a home, and your credit scores are below 700, you should immediately focus on getting your scores up, before you start the pre-approval process.  While you may be able to get a loan with scores below 700, the interest rates won’t be as attractive, your down payment will often have to be greater, your income higher, and your cash reserves higher. 

How to Improve Credit Scores

Information on how to improve your credit scores will be provided in a future blog!

 

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