Many people who think they cannot qualify for a home loan due to a low credit score are often incorrect. Your credit score likely can be lower than you think to get you a loan approval. And often, a lot lower! Below are updated credit score requirements for getting a home loan with a market-low interest rate. There are many obvious advantages of good credit home loans. It's no secret that people who have high fico scores above 700, typically get their loan processed quicker as there are less "red flags" reported by Trans Union, Equifax and Experian. Clearly people with good credit scores get more access to mortgages with lower and more competitive interest rates. Borrowers that have high credit scores typically will be offered loans with a smaller down-payment required. In some cases, mortgage lenders justify reduced fees and closing costs for borrowers that have "good credit scores."
Generally, the minimum credit score for getting any type of home loan is 500. However, these days, it IS possible to get a mortgage without any credit score. How is that possible? Are credit scores really subjective? Read on!
Home Loans Insured by FHA
The Federal Housing Authority backs millions of home loans every year. This means that the program guarantees the loan in case you do not pay. So, private lenders are willing to extend very generous qualification standards for FHA loans. If fact, as of summer 2016, it was reported that major private lenders now will approve FHA applications for people with credit scores as low as 580! That is a 60 point drop from 2014; at that time, you had to have a 640 FICO to be approved for a loan.
Another major factor in the popularity of FHA house loans is that only a 3.5% down payment is needed. That is why FHA loans account for ¼ of all home loans across the US. Also, there currently are fewer 'FHA investor overlays,' and this means more approvals. What this means is that FHA lenders may on their own impose more restrictions on doing home loans than FHA does. One of these 'overlays' in the past has been an FHA Streamline Refinance. If you are doing one of these refis, FHA does not require the lender to verify income, employment or credit. However, most lenders still did so because FHA will levy a penalty if a lender has too many loans go bad. Another common overlay has been related to credit scores. FHA rules state that 500 is the minimum credit score required for a loan, but many banks will not make the loans. But as noted above, the minimum credit score for many FHA lenders is now 580. If you score is lower than 580, make sure you are speaking with companies that underwrite a FHA mortgage for bad credit.
A USDA loan is a good choice for a low or moderate income borrower who wants to get 100% financing. That's right – no down payment required! You do need to buy a home in a rural area, according to how USDA defines it, but still, this is a great program. As of fall 2016, the minimum credit score for a USDA loan for automatic approval is 640. However, you can go under that for a USDA mortgage that is underwritten manually. Also, if you have a debt to income ratio of 29% for home loan debt and 41% for all debt, you may need a 680 FICO score to be approved automatically. For a manually underwritten USDA loan, which takes longer, the middle score for all borrowers has to be at least 600. Further, you cannot show more than a single payment that has been 30 days late in the last 12 months. There also is a requirement that any Chapter 7 or 13 bankruptcies are at least three years ago.
Veteran Home Loans
If you are a veteran or current member of the military, you do not have to have good credit to get a VA mortgage. The VA is like FHA in that it does not do loans itself; it oversees the program and guarantees the loans. Most VA lenders do not have credit score minimums but some still do. You may need to look around more if you have a credit score under 620. You also do not need to have a down payment to qualify for a VA loan.
Fannie and Freddie
The minimum credit score for these federally backed mortgage loans is 620. However, experience shows that some borrowers can be approved with a lower score if they have 'compensating' factors. These can include having a lot of cash reserves, or having high income.
Fannie Mae and Freddie Mac underwriters understand that there can be legitimate reasons for lower credit scores. For example, you could be paying your credit cards on time but you are using 90% of your limit. This will drop your credit score by 50 points or more. A bigger problem for these types of loans is if you have a legitimately 'bad' credit history that includes several collections, charge offs and missed payments. If that is the case, then you may be better off getting your credit better before you apply.
Getting approved for one of the above mortgages is actually easier than it was five years ago. It also pays to shop around at different lenders, as one lender may have more lenient standards than another, even if both are 'approved' by FHA, VA or USDA. Every lender is different.
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