When thinking about buying a home, credit score always pops up. What exactly is credit score and what does your credit score have to do with your ability to purchase a home?
Your credit score will dictate what type of loan you may qualify for, as well as having an influence on your interest rate. Scores can be anywhere between 0, someone with absolutely no credit in the USA, to a top score range of 740 and above. The credit score is only one piece of the loan puzzle. Your income, debt load, savings, and down payment amount all figure into the final decision on your home loan. If your credit score is low, it is worthwhile to build it up to have more choices on financing, and lower interest rates which translate to smaller mortgage payments. The average home buyer has a credit score ranging between 680 – 739, which doesn’t affect interest rates much, if at all.
FHA Loans
FHA (Federal Housing Administration backed loan) is the most common type of financing. Down payments are smaller, as little as 3.5% with a minimum credit score of 580. For scores under 580, there are limited other options for FHA financing with more money down.
Conventional Loans
Conventional loans generally have lower interest rates, require a higher credit rating (620 is the normal minimum score), and offer a down payment option of between 3 and 20%. If you are able to put down 20% on your home, the PMI (Private Mortgage Insurance) is no longer required. PMI can be costly ranging between .5 and 1% of your total loan annually.
VA Loans
VA (U.S. Department of Veterans Affairs backed loan) are for veterans only. No down payment is required, but there is an up front funding fee, which can be rolled into the loan. The funding fee is 1.25 – 3.3% of the total loan. Most lenders do require a minimum 600 or so credit score for a VA loan, but some will take scores as low as 500.
The best plan of action is to contact a loan officer to have your credit and credit score evaluated to create the right financing plan for you. Make sure to start your home buying journey by finding out what amount of home you will qualify for, or if you need to put the home buying process on hold to repair some credit repair issues first.