To buy a home, you don’t need flawless or even decent credit. In reality, getting a mortgage requires a minimum credit score of 580, which is just called “fair.”
Keep in mind that mortgage lenders do not look at the credit report in isolation.
Your credit history, debts, and down payment are all taken into consideration. The higher your score in these places, the more likely you are to be able to get away with a bad credit history.
The disadvantage of having poor credit is that you would have to pay a higher interest rate. Many low-credit borrowers, on the other hand, choose to invest now and refinance later as their credit increases.
Minimum credit ratings vary depending on the mortgage product
The credit rating used to purchase a home is determined by the type of loan you are applying for.
The five most common choices have credit requirements ranging from 580 to 680.
- 620 minimum for a conventional loan (backed by Fannie Mae and Freddie Mac)
- The minimum credit score on an FHA loan is 580
- A 620 minimum credit score is standard for a VA loan (varies by lender)
- The minimum credit score for a USDA rural housing loan is 650
- Minimum 680 for a jumbo loan (for high-priced real estate)
It’s worth noting that FHA loans permit credit scores as low as 500. If your credit score is less than 580, you’ll need a 10% down payment to apply. FHA loans provide a 3.5 percent down payment for applicants with credit ratings of 580.
In regard to credit ratings, lenders consider the following factors when evaluating borrowers:
- Most lending programs require a minimum of a 3% down payment.
- History of earnings and employment: Most financial institutions need at least two years of consistent earnings and employment.
- Savings: You’ll need money for a down payment, closing expenses, and, in some cases, cash deposits.
- Debts owed: Your debt-to-income ratio applies your monthly gross income to pre-existing obligations like student loans, vehicle loans, and credit card minimum payments. Your DTI should be as minimal as possible.
- If you have bad credit, your loan balance would most definitely have to stay under FHA or conforming loan limits.
If your credit rating is low, however, you have a steady paycheck, a sizable bank account, and a balanced debt burden, you’re more likely to be eligible for a mortgage.
Comparably, if your credit ratings are excellent but your other indicators are just decent, you have a decent chance of getting a loan.
To get acceptance, you don’t have to be flawless in any way.
The trick is to realize that lenders consider your entire application — not just your payment history — and to find a loan package that meets your specific needs as an applicant.
For a mortgage, what is considered “good” credit?
While you can purchase a house with just reasonable credit, a higher credit score would earn you a better interest rate and favorable loan terms.
But, when it comes to a loan, what constitutes “good” credit? Since FICO is the common scoring model used by loan officers, the credit tiers are a good place to start.
In reality, in the year 2020, the median credit rating for closed residential mortgages was at about 750.
Borrowers with credit ratings above 740 get the highest offers from Fannie Mae and Freddie Mac.
Financial institutions are aware that flawless credit isn’t the rule, and they aren’t anticipating astronomically high credit ratings.
The firms that back most mortgage loans, Fannie Mae and Freddie Mac, provide the highest terms to homeowners with credit ratings above 740, implying that the “average” buyer in 2020 will qualify for prime rates.
