Houses for Sale

In the Market for a New Home? Here’s What You Need to Know About Credit

If you are in the market for a new home, you might be curious about your credit score and how it will affect your options. The higher your score is, the better your chances of being approved since the lender is able to see that you have a positive payment history. There is no universal minimum FICO Score requirement to qualify because the requirement varies according to the type of mortgage loan you are searching for. Here are the types of loans you can obtain and the guidelines to be approved for each one.

Conventional Mortgage Loan

Conventional mortgage loans are most suitable for buyers who have a FICO Score that is 740 and above. The requirements for this loan are much stricter than that of an FHA loan for example and they are not insured by any government agency which makes them a much higher risk for lenders. Conventional loans for buyers with outstanding scores typically have low down payment requirements and low interest rates due to their very high credit worthiness. This type of loan offers the most flexible repayment plans, 15-30-year terms for instance. The minimum score requirement varies by lender, however, it is ideal to have at least a FICO score of 620 before applying for a conventional loan. If your score is lower, you might opt to try the FHA loan route.

FHA Loan

Unlike conventional loans, FHA loans are in fact insured. They are insured by the Federal Housing Administration, which takes so much financial pressure off of lenders. This fact, along with the low FICO Score requirement, makes FHA loans so much easier to obtain than a conventional loan. This loan only requires a minimum of 580 FICO Score and allows buyers to pay down payments from as little as 3.5%, a cost-effective option for those who are on a tighter budget or who are just looking to spend the money on other areas of the home buying process. If you are still working to rebuild your credit, and you’re hoping to not put down much cash upfront, an FHA loan is a great option for you.

VA Loan

This type of loan has a target audience and you must meet the requirements to apply. VA loans are insured by the U.S Department of Veterans Affairs, there is no minimum FICO Score, and they don’t require any down payment! They even work with buyers who have less than desirable credit and don’t make them pay mortgage insurance. In order to qualify, you must either be a veteran of the U.S military, U.S Military Reserves, or National Guard. Spouses who lost someone to the service or whose spouse suffered a disability as a result of their service, also qualify. VA loans charge a funding fee; this is a one-time payment and it depends upon two factors, your down payment and the type of service you or your spouse were involved in. If you opt to go for the no down payment perk, as a U.S military veteran, you would pay a one-time, 2.3% funding fee.

Can I Purchase a Home With Bad Credit?

If your credit is poor, it will be difficult to find a lender who is willing to take a risk on you, however, it is not impossible. A low score implies to lenders that you often miss bill payments or accrue large amounts of debt without paying it down. Due to the massive risk they are taking on, lenders will charge buyers with poor credit very high interest rates and even raise their minimum down payment. If you are willing and able to front these costs and pay more over the duration of your loan term, you can still find a lender who will work with you. If buying a home is not urgent and you are able to wait a bit, try to build some positive payment history and pay down some debt. Missing even just one payment takes quite a hit on your score, and if you have a high amount of debt, this does not look good to lenders. They might think you will be unable to handle any more on top of it. If you are someone who is wanting to purchase a home and is stressed about their FICO Score, don’t lose hope. There is a loan and a lender that is right for every type of buyer.