Your credit score determines whether or not your loan will be approved. But that is not all. It will also affect the amount you pay for the home every month and the mortgage insurance.
What Credit Score Is Needed to Buy a House?
The minimum credit score requirement depends on the type of loan you want.
There are 5 main mortgage programs and each one has a different credit score requirement.
- Conventional: the conventional home loan requires a minimum score of 620. If it’s an investment property or vacation home, the required score may be higher.
- FHA: the minimum score here is 580. But if your down payment is 10%+, they will allow a lower credit score.
- VA: a minimum score is not usually imposed with this type of loan. But most lenders set the minimum at 620. Others may set it lower (even 580).
- Jumbo: the absolute minimum for this type of loans is typically 620. The loan amounts are high and offered by private sources. The minimum may be higher, up to 680.
- USDA: there is no fixed minimum for USDA mortgages. But for a standard approval you will need a minimum score of 640.
HELOCs (home equity lines of credit), home equity loans and second mortgages set their own minimum.
How Your Credit Score Affects the Interest Rate
After meeting the credit score requirements, the next step is knowing how much interest you will pay. Secondary financing, jumbo mortgages and conventional mortgages involve tiered pricing. This means that there are a number of factors that will determine your loan rate.
The factors include your credit score, type of loan (adjustable or fixed) and loan-to-value ratio.
With a credit score of 630, you may end up paying interest that is 1.5 points higher than someone with an excellent score. Over the years, the difference could be $50,000+.
Private Mortgage Insurance Factor
With jumbo and conventional mortgages you will have to pay PMI (private mortgage insurance) if your down payment is less than 20 percent.
PMI is different from mortgage life insurance. The latter pays off your mortgage in the event of your passing. PMI will pay off the lender in case you default. So if you have a lower credit score, it is assumed that you are at a higher risk of defaulting and your monthly payment will be higher.
Improve Your Credit Score Before You Apply for a Mortgage
How do you do this?
- Monitor your credit: get your credit score for free from Credit Sesame or Credit Karma.
- Request a copy of your report: make sure you get official credit report copies from the three main bureaus: TransUnion, Equifax and Experian.
- Dispute negative entries: if there are any negative errors, dispute by filing a formal report. If you have documents that support your point, the entry can be corrected or removed.
- Lower your credit utilization: this is how much you owe on credit cards and loans. Lower it to improve your score.
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