Credit Score Needed to Buy a House: What Is the Cutoff?
To get a home loan with a low-interest rate and fair terms, you need to think like your lender and keep up with Mortgage rate news. This will help you learn and prepare for the task ahead, and determine the correct credit score needed to buy a house of your choosing.
How can you think like a lender, when you don’t know the credit score needed to buy a home?
Our first task in this article is to figure out the general credit score ‘cut-off’ accepted by most lenders (though some may differ). Then, we’ll connect the dots and explore how a low credit report could harm our chances of getting a mortgage loan.
Credit Score Needed to Buy a House – Outline
- What credit score gets you the best mortgage rate?
- How to get a fair mortgage with a bad credit score
- Types of government-secured loans
- How your credit score affects your mortgage rate
- What interest rate can I expect with my credit score?
What Credit Score Gets You the Best Mortgage Rate?
Different credit companies have different criteria to qualify for a loan. Some will lend you money for a credit score as low as 500 or 660, but give you high-interest rates and brutal terms and conditions.
Getting approved is not the issue; the main challenge is qualifying for a mortgage with low interest and fair terms.
This leads us to the question, “What is considered a good credit score to buy a house?”
The current credit score requirement in the USA is 695. But for fair interest rates, you need to score no less than 740 before applying for a mortgage.
Have no idea what your credit score is? Check credit score
How to Get a Fair Mortgage with Bad Credit Score
There are different ways in which you can get a mortgage with decent interest rates.
The first way to getting a home loan with fair terms is to improve your credit score. If you need the mortgage urgently, and you’re stuck with a bad credit score, you can opt-in for government loans.
Note: The government does not fund most government loans, but every government loan is protected or guaranteed by the government.
The benefit of applying for a non-funded government loan is that it helps you get a private loan with more moderate terms and lower interest rates. A government-secured loan co-signs with the citizen (borrower) on loans provided by privy companies, while government-funded loans get their capital from tax-payers’ dollars. The implication of securing a loan is that the government has to repay the lender if the borrower defaults on loan repayment.
Types of Government-Secured Loans
FHA (Federal Housing Administration) Loan Refinance
Citizens who have equity in their homes are allowed to use the equity of the house as payment for a large purchase, or for reduced bank interest rates on loans. To qualify for the FHA loan, the house with equity must be your principal residence. Additionally, you must have a minimum credit score of 580.
FHA refinance options include:
- Cash-Out Refinance
- Streamline Refinance
- No Cash-Out Refinance
USDA Refinance Loans
The good news for those with a USDA loan is that they’re eligible for a USDA refinance loan. This loan gives eligible homeowners the privilege of borrowing a home loan with a reduced interest rate, despite the mortgage-to-value cap. You don’t need any home price appraisal or out-of-pocket expenses, because closing costs can be added.
USDA Streamline Assist refinance requirements:
- Due payment for at least a year.
- Mobile houses are not included in the program.
- Participants are not allowed to cash out.
VA Home Loans
The Veteran’s Administration loan is designed for veterans, services members, and surviving spouses. There are two options, namely:
VA Cash-out Refinance Loan:
This is an option for eligible members, who want to withdraw their home equity to settle debt, pay school fees or upgrade their home. It’s also possible to convert a non-VA loan into a VA Loan by refinancing.
VA Interest Rate Reduction Refinance Loan:
This loan is only available to those with a current VA guaranteed loan. Its purpose is to reduce your monthly payments and VA loan interest rate.
Note: applying for a new VA refinance loan doesn’t change your current eligibility status.
Wondering how much credit history is needed to buy a house? We have covered the essential details regarding credit and housing requirements. However, how does credit score affect mortgage interest rates?
How Your Credit Score Affects Your Mortgage Rate
Although it’s not the only criterion, your credit score can determine whether or not the credit card company approves your loan application. Other factors to consider include debt-to-income ratio, account balance, and amount of money available to put towards the down payment.
Having a good score ranging from 740 upwards guarantees lower interest rates and fairer terms. However, even a poor credit score can qualify you for a home loan (at a higher interest rate). The reason for the increase in price is due to the perceived risk of lending money to a consumer with bad credit history. Lenders increase the interest rate, in case the borrower defaults.
What Interest Rate Can I Expect with My Credit Score?
Check to see the category you belong to. Below is the list of interest rates per credit score (in the USA);
- Bad — credit score range is from 300 to 579. With a low credit score, expect a high-interest rate on your loan.
- Average — the credit score range is from 580 to 669. An average credit score can get you a fair interest rate, depending on the credit score company you’re applying to.
- Good— the credit score range is from 670 to 739. With a good credit score, expect rates within 0.25% to 0.5% of the lowest available.
- Excellent — an excellent credit score starts at 740. You can get the smallest interest rates and the best payment terms within this credit score range.
Credit Score Needed to Buy a House – Final thoughts
Although there’s no universal cut-off, our experienced lenders give us an idea on what the market allows as well as say that experience is the best teacher. This article has provided information regarding what kind of credit score is needed to buy a house.
Published April 20, 2019; Updated May 20, 2019.