If you're interested in buying a house, two of the chief deciding factors are your income statements and your FICO credit score (Fair Isaac Corporation or FICO®). Many wonder what the minimum credit score is that they'll need to get home loan. That depends on the type of loan you are pursing.
If you are seeking federally backed loans - FHA (Federal Housing Administration) or VA (Veterans Affairs), the lowest or minimum credit score you'll need for automatic approval is 620. Approval might only take a matter of days. On the other hand, if a lender sees that your credit score is below 620, you will probably be required to provide additional documentation. Also, your loan approval could take as long as 30 days since your loan will be moved to a manual underwriting queue.
Conventional loans are not government backed like FHA or VA loans and are therefore riskier so, to buy a house, requires a higher minimum credit score. Conventional lenders, on average, call for a minimum credit score of 680. If your credit score exceeds 680, there is good news. Lenders will typically give you better loan terms and interest rates - especially as your score rises.
What if you have less than the lowest or minimum credit score needed to buy a house? You still have options. A good credit report is a powerful alternate path to homeownership. Even for those interested in buying a house whose credit scores are low. If a potential home buyer is able to demonstrate at least 2 years of financial responsibility using 1) a current credit report or, 2) a nontraditional type of credit such as a solid payment history on rentals and utility bills, numerous underwriters will feel secure enough to grant a home loan.
With that said, it's important to check your credit history from all three of the credit reporting agencies - Equifax, Experian and TransUnion. Each credit reporting agency calculates your score differently. For example, your Equifax credit score may be more or less comprehensive or current than say your Trans Union or Experian score.
Mortgage loans are substantial risks for lenders, so they require all the risk management tools they can possibly use which is why they usually buy all three of your credit agency scores.
Naturally, if you have a high credit score versus an average score, the sooner you could be living in your dream home and the lower interest rates you'll pay.
How do credit scores affect what you pay for your house? If, for example, you have a good (700 plus) or excellent credit score of 720 you may qualify for a mortgage rate of as low as 5.5 percent (depending on the current rates). However, suppose your credit score is low such as 580, then your interest rate by comparison could be as high as 8.5 percent. Over the course of a traditional 30 year home loan of say $100,000, those three extra points of interest add up to an additional $72,000! When buying a house your credit scores can cost or save you tremendous amounts of money!
When applying for a mortgage or home equity loan, follow these tips:
Taking proactive steps like using CreditScoreCenter.org credit monitoring services can help you get your credit score where you want it so you can buy your new house for less - and much sooner than you think!
