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So, you’re thinking it’s time to buy a house? Congratulations!
Now, it’s time to figure out the logistics. Lenders will look at a few different metrics to determine whether or not you qualify for a home loan.
One of the metrics is the debt-to-income ratio, which compares your monthly income to your monthly debt payments. Calculating this ratio is how lenders determine whether or not you can manage a mortgage payment given your current debt responsibilities.
The second big metric that lenders look at is your credit score. Your credit score is a risk score that shows how good or bad you are at managing credit. Your credit score can impact your loan approval and your interest rate.
There’s a baseline credit score that’s typically required for different home loan types. Here’s a breakdown of what you need to know:
What Credit Score You Need for a Home Loan
If you’re new to the whole home loan thing, don’t worry. In this post, we’ll break down a few key points about each popular home loan along with some information about credit requirements starting with the FHA loan.
The FHA loan program is probably one you’re familiar with because of the low down payment requirements and lenient eligibility rules. The Federal Housing Administration backs the FHA loan and it is distributed by FHA-approved lenders.
You may be able to put as little as 3.5% down if you have a credit score of 580+, and 10% down if your score is less than 580.
A conventional loan is the most basic of loans. It’s a loan without government backing. Some conventional loan programs will let you put down as little as 5% if you have private mortgage insurance. Private mortgage insurance is a premium that you pay to cover the lender from risk if you default on the loan since you’re putting so little money down.
Conventional loans can have more stringent credit requirements than other loan options. Generally, you should have a 620 or over to get approved. However, a higher score (in the 700’s area) is more ideal because you can likely get a more competitive product.
A USDA loan is a government-backed loan available to people buying houses in certified rural areas. USDA loans are meant to spur homeownership in underdeveloped locations.
This loan is a unique one because it can offer 100% financing (a.k.a. no money down) if you qualify. The USDA doesn’t have a minimum credit score for this loan. However, lenders may require a score of around 640.
A VA loan is a loan backed by the Department of Veteran Affairs, and it’s for eligible veterans and family members. The VA loan is another unique home loan that can offer 100% financing (no money down). The minimum credit score for the VA loan is around 620, but varies.
Shopping Around is Your Best Bet
Remember—mortgage lending is a business. When you’re ready to buy, put on your investigator cap and get ready to shop around. You are the customer and the lender needs to earn your business. Look for someone who gives you the best deal, answers your calls, and treats you like a valued customer.
Mortgage requirements may not be the same from lender to lender.
Different lenders can add overlays at their discretion. Overlays are stricter requirements that are above and beyond minimal requirements for a particular home loan. Just because you don’t get approved from one lender doesn’t mean others will also say no. Just continue your search for the right lender.
Start Working on Your Credit Score Today
Even if you meet the bare minimum credit requirements above, improving your score can help you get a better deal on a loan. A lower interest rate can save you several thousand dollars over the life of a 30-year mortgage.
A credit repair service may be able to help if your score needs some work. Creditrepair.com, for example, can look through your credit reports for you to find areas of opportunity where you can dispute incorrect or incomplete records.
After removing negative remarks, you may see some score improvement. Learn more about Creditrepair.com here.
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