If you are planning to buy a new home, knowing your credit score can give a fair idea of how much you can afford, whether you will be eligible for a mortgage, or how much interest rate you will have to pay. All these are directly related to your credit rating, which is one of the primary documentation that determines your creditworthiness. In addition to optimum debt-to-income ratio and financial stability, lenders will review your credit report to determine whether to approve or reject your home loan application.
So, what credit score you should have to buy a new house?
The answer is – it varies depending on the type of mortgage and interest rate you are considering.
Minimum Credit Score Required for New Home Loan
Considering the USA’s current economic scenario, many home buyers are apprehensive about whether they will qualify for a mortgage loan or not. However, for conventional home loans, lenders require a middle FICO score of minimum 620.
FHA Loan Credit Score Requirement
Don’t have a credit rating of 620?
The good news is that the Federal Housing Administration (FHA) has lower credit rating requirements, approving mortgage even to home buyers who have a poor score. Typically, FHA provides loan assistance to first time home buyers by offering lower down payments. If your FICO score is 580 or more, you can be eligible for only 3.5% down payment on your mortgage loan.
However, FHA also offers bad credit home loans, i.e., offering mortgage loan to buyers who have a score lower than 580. In such cases, as per latest FHA policies, the buyer is liable to pay 10% down payment of the total loan amount.
The objective is to provide everyone with the opportunity to buy a new home, irrespective of their credit background. This is because bad credit does not necessarily disapprove of the buyer’s financial credibility. It may be due to the factors beyond one’s control. For instance, unable to make monthly payments, say from after one year, because of huge medical bills, loss of income, etc.
Nevertheless, credit score is not the only factor that FHA considers to determine your loan eligibility. Your application for a mortgage loan should be backed by substantial evidence of the current financial condition, reduced debt-to-income (DTI) ratio, number of on-time payments done earlier, and other aspects.
So, whether you are ready to pay a higher down payment or want to use it to improve your credit report is up to you to decide.
Other Bad Credit Home Loan Requirements
There are several other banks, financial institutions, and mortgage companies that offer home loans ideal for buyers who have a lower credit rating, high DTI ratios, lack of income proof, or who had a credit event such as bankruptcy, foreclosure, late payments or credit card settlement. They may not qualify for conventional loan products, but have a good chance of getting approved by mortgage agencies specializing in bad credit loans.
For such type of mortgage loans, the credit score requirement will vary based on the loan amount, DTI ratio, and necessary documents available with the buyer.
For instance, if the home buyer is able to provide full documentation as required by the mortgage company, the score eligibility may be 580 and even less. If the buyer provides alternate documents such as 12-months personal bank statement, 1 year tax return and 1 year W-2, the minimum FICO score requirement may be 620 or less.
It also depends on the loan amount you are considering. A minimum of 500 scores is also acceptable if the loan amount is more than $1 million but less than $2 million, has cashed out of 65%, and purchase & L/T of 70%. If you have a debt-to-income ratio as high as 50%, the minimum score requirement may be 620. However, if the DTI ratio is 55% or more, the FICO requirement may be 680.
The minimum credit score requirement varies from lender to lender and depends on several factors. Often, you may have to negotiate by paying a higher down payment or higher interest rates to secure a mortgage loan with bad credit. It is advisable to shop around to get the best offers.
Typical Mortgage Types & Minimum FICO Score Requirements
As we discussed earlier, the minimum FICO score requirement varies depending on the type of mortgage loan you are planning to have. Here is a brief outline of different standard mortgage types and their minimum score requirements:
- Conventional Loan: 620+
- FHA Loan: 580+ (You can also get approved with a lower FICO, but by agreeing to pay a higher down payment)
- USDA Loan: 640+ (No down payment loan requires a higher score)
- FHA 203K Loan: 620+
- VA Loan: 580 – 620+
To know your credit score or to apply for a home loan with bad credit, talk to an expert today.
How to Get Home Loan with Bad Credit?
Mistakes happen. Maybe you missed paying the monthly payments for your loan, or recently reviewed your credit report and discovered errors. Whatever it may be, you now have poor credit to deal with unless you take steps to improve the same.
Getting a bad credit home loan is not impossible. In fact, there are several lenders who have loan products especially for people with a pitiable FICO score. In such cases, however, the interest rate payable is much higher, or you have to pay a higher down payment amount.
Thankfully, there are institutions such as FHA who have some of the lowest FICO score requirements, offering loans at 580 with only 3.5% down payment. For a higher down payment percentage of 10%, they approve loans with the score as low as 500. The Department of Veterans Affairs also has low credit score eligibility requirements, offering a little as 0% down payment on the property for military veterans.
See below to know what options you have:
While there are several new bad credit home loan programs out there in the market, you may also choose to wait and improve your score before actively participating in buying a new home. Discussed here are some excellent ways to improve your rating:
- Pay All Your Credit Card Bills: Sounds challenging, but it is the easiest way to improve your score. Before you apply for a mortgage loan, make sure you pay all outstanding and current credit card bills for at least one year. Recent and on-time payment history holds more value to lenders than a three years old record.
- Pay Your Utility Bills on Time: The objective is to showcase your financial stability to the credit bureaus and the potential lenders. For this, it is vital to strike a balance between your income and expenditure. Create a monthly budget based on what you earn. That will make more sense for you.
- Save More for Down Payment: If you are able to pay at least 20% down, you can get instant approval for your home loan even if your score is wretched.
Today, there are better options than ever for home buyers with poor credit. For a majority of borrowers with lower FICO, FHA is the best bet. And if you are a military veteran or ready to pay a higher down payment, VA loan or Non-QM loans are good options for you.
Getting a Home Loan After Foreclosure
Many people who have gone through foreclosure often wonder whether they will be able to repurchase a home. Yes, your credit report can be badly hit after foreclosure, and you might have to wait long before you can apply for a home loan again. Having said that, there are options to get a home loan after foreclosure; thanks to the less stringent policies issued by the lenders today.
Discussed here are different options and waiting period to get a home loan after foreclosure:
- To qualify for FHA bad credit home loans, you have to wait for three years from the time your foreclosure case ended.
- For Fannie Mae/Freddie Mac loan, you have to wait for seven years after a foreclosure before you can get another loan. However, the waiting time can be shortened to three years if you fulfill the following requirements:
- Provide in writing that the foreclosure was a result of unexpected or adverse situations
- Show that the new loan will be used either to buy your personal residence or for limited cash-out refinance. It cannot be used to buy an investment property or second home
- Highlight that the maximum LTV (loan-to-value) ratio of the new loan is 90% or what is listed in their eligibility matrix, whichever is higher
- For a conventional home loan, the waiting period may vary from 2 – 8 years, depending on the percentage of down payment or a higher interest rate
- For VA loans after foreclosure, the waiting time is two years
Buying a Home After Bankruptcy
To be declared as bankrupt isn’t a death sentence. You still stand the chance of getting a mortgage loan to buy your new home. Follow the below steps:
- Discharge your bankruptcy, which releases your liability from specific types of debts, and prohibits the lenders to take any collection action against you on the discharged debts.
- Rebuild your credit as discussed in the previous sections of this article
- Wait for a certain time span as required depending on the type of loan you wish to apply for
As your creditworthiness improves over time, you can achieve your dream of buying a new home by getting the best loan offers.