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Credit scores are critical to the home buying process. Not only does your FICO score determine if you can qualify for a loan in the first place, but it it will also impact your mortgage terms — the higher your score, the lower your interest rate.
You can probably buy a home even with a lower score, but you’ll have different options than someone with a higher one. For FICO scoring models that top out at 850 — some models go higher — here’s what you can expect based on your credit score range:
Having bad credit — or no credit — means you’re unlikely to get a mortgage unless someone is willing to help out.
“Their only option would be to have a friend — or more likely a family member — purchase the home, add them to title, then try to refinance into their name(s) when credit scores improve sufficiently,” says Ted Rood, a senior loan officer in St. Louis.
If you have a credit score in the 500s, it’s likely that your best choice for a home loan will be one insured by the Federal Housing Administration. But with a credit rating of 500 to 579, be prepared to put 10% down.
“Someone with a 500 credit score is likely to have some combination of collection accounts, liens and judgments,” Joe Parsons, a senior loan officer with PFS Funding in Dublin, California, says. “Even though FHA will insure a loan with a 500 score, the lender will require that collections, judgments and most liens be paid off before closing.”
The FHA also allows loans with down payments as low as 3.5%, but to qualify, you’ll need a FICO score of 580 or better. Some lenders will also authorize mortgages guaranteed by the Department of Veterans Affairs, commonly called VA home loans, at this level.
Potential home buyers with credit scores of at least 620 have more options. VA-backed mortgages definitely come into play. That can mean you won’t make a down payment and you’ll pay very favorable interest rates. USDA-backed loans are also available to those with a minimum 640 score.
FHA loans for remodeling, known as 203(k) loans, are underwritten at this FICO score level.
Most importantly, conventional loans — the mortgages lenders like best — are available to qualified borrowers with credit scores of 620 or higher.
Home buyers with credit scores of 700 or greater qualify for better mortgage interest rates, as well as for higher value homes that require “jumbo” mortgages.
With a FICO score of 740 or higher, you’re likely to get the most favorable interest rate available, especially on a non-jumbo, conventional loan.
Borrowers with higher scores also earn a break in the cost of private mortgage insurance if they make down payments of less than 20%. Parsons says with a 10% down payment, a 620 borrower will pay 1.1% in PMI. A 760 FICO borrower would pay just 0.30%, he adds.
Of course, every lender has different underwriting standards, so credit score qualifications can vary. And your ability to repay plays the most important role in getting approved for a home loan. To determine that, lenders review your monthly income minus your recurring debts (your debt-to-income ratio), as well as how much money you’re putting down (loan-to-value).
Having money in a savings account — beyond what you’ll need for the down payment and closing costs — can also work to your favor.
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