A credit score or rating can seem like a confusing topic to some people, especially if you have no financial background. However, it is well known that a good credit can greatly increase your chances of obtaining credit, such as mortgage and credit card services.
However, before you can receive this credit, you must meet the minimum requirements. These requirements include a good credit rating. Most mortgage lenders today use a standard credit rating system known as the FICO® Score.
While this rating system plays a crucial role during the mortgage application process, financial institutions use several determinants that will assess whether you deserve the loan. These factors include income, assets, debts, and the valuation of the property, all of which determine whether you can get the mortgage approved.
We’re going to look at the various credit scores you need to know before applying for a mortgage loan and how lenders check your creditworthiness. We’ll also check if you can Obtaining a bad credit mortgage and how to turn your bad credit history into a good one.
How Lenders Check Your Credit Score?
Credit scores are a numerical system that provides insight into your credit profile. Different financial institutions use different credit rating systems to determine a borrower’s creditworthiness. The two most common credit rating systems are the FICO® Score and the Vantage Score. Most mortgage lenders use the FICO model.
Excellent credit history and scores help ensure that you as an individual can earn a loan and be able to repay the mortgage. If you have poor credit, lenders can set more stringent mortgage requirements for you or they can deny you credit altogether.
Minimum credit rating that you need for a mortgage loan
The creditworthiness requirements vary over time, and currently this condition varies depending on the type of mortgage you are trying to obtain. Here is a detailed overview of these different mortgage types and their required minimum FICO® scores.
Understanding the creditworthiness requirements will help you if you can Get your mortgage approved.
1. CONVENTIONAL MORTGAGES
Traditional mortgages are credit loans that you can use when buying a home, and they follow Fannie Mae and Freddie Mac standards. These government agencies insure such mortgages. If you want to secure such a loan, you need a FICO® Score of around 740 or higher to get the best interest rates. If you meet this requirement, you can take out a conventional mortgage loan on the best terms.
Potential homeowners looking to access conventional credit must have above average credit ratings. Some credit institutions will only give you a 620 credit loan, but you will not get the cheapest rates and terms.
2. FHA LOANS
FHA loans refer to mortgages that are insured under the Federal Housing Administration, which means they are less volatile and risky. Getting an FHA loan is often easier than a traditional loan. This mortgage option allows the loan applicant to make a small down payment of 3.5%.
You also get access to equity refinancing and can refinance approximately 97.75% of the property value of the residence.
FHA mortgages allow potential home buyers with lower credit scores to secure a home. A major benefit of the FHA loan is that you can readjust your monthly repayment installments after consulting your bank or other financial institution.
For FHA mortgages, you must have a credit rating of at least 580 and above before you can apply for the loan. The down payment is a measly 3.5% and you don’t need an official FICO® score to get the loan.
3. VA LOANS
VA loans refer to mortgages that are insured and offered by the US Department of Veteran Affairs. These mortgages are popular because they do not require down payments and are easily accessible to potential low credit borrowers.
Before you know the creditworthiness required to buy a home with VA Loans, it is best to research your approval requirements. These requirements include spouse relationships with deceased service members or veterans in the U.S. military.
What creditworthiness do you need when buying a home?
Most financial institutions and lenders set a basic credit score that serves as a qualifying standard when applicants apply for a mortgage. As long as you have a credit rating over 700, you can easily get a low-interest mortgage that you can slowly repay.
However, if your current credit score is in the 600 range, some financial institutions may view you as a financial risk and limit your mortgage options. For example, if your credit score is 680, lenders may still find you creditworthy and you can take out a mortgage.
Most lenders prefer to use a credit score of 620-640 as the minimum credit score for obtaining a quality mortgage. One of the best ways to quickly improve your credit score is to use a Financial services such as credit karma.
Credit Karma gives you the knowledge to make the right credit decisions – the ones that will help improve your credit score.
Can You Buy A Home With Bad Credit?
From a financial point of view, you can get your own home even with a bad credit rating. If your credit score is in the 500 range, you can still qualify for a subprime mortgage loan. Such loans come with additional fees and higher interest rates.
Additionally, subprime loans require you to pay a 20% down payment if you do not have the required creditworthiness to buy a home. If you do not have the down payment for the mortgage, you will have to take it out private mortgage insurance that often has expensive premiums.
Credit scores can fluctuate depending on your current financial situation. You can improve a bad credit rating by working on your credit rating and your score will slowly go up. First of all, look at your bad financial habits and see where you can save.
Also, take a look at ways to reduce your debt burden and clear up any credit reporting errors that could affect your creditworthiness. Nowadays, you can get a free credit score score and tips on how to improve your financial situation to make sure you have a good credit score. As mentioned earlier, credit karma can really help with this.
If you have poor credit, it is best to improve your credit rating so you can qualify for low interest mortgages.
When obtaining a mortgage loan, the best thing to do is to gather all the relevant financial documents and find a loan co-signer. It would also be helpful if you clearly understand where your credit standing is right now and identify efficient techniques to improve it. Hopefully you have found the creditworthiness tips useful for purchasing a home.