When shopping for a home loan, consumers need to know where they stand with their FICO score to better gauge their chance of loan acceptance. It’s common knowledge that lenders want to see good credit history, but the factors playing into that are more detailed. And exactly how strong your score is can mean the difference in thousands of dollars in interest over time.
So What’s a “Good” FICO Score?
Consumers are grouped by credit into categories of excellent, good, fair or poor according to their FICO score. Mortgage lenders usually have a minimum score that loan applicants must meet in order to qualify. For most, that minimum FICO score is 640. In 2016, the average credit score for American consumers was 699, so most people are well above that 640 threshold. A score of 640 is considered below average, but it’s not completely impossible to find a lender. With a score below average, your chances are increased if you have a larger downpayment or a higher than average income. Scores in the range of 620-679 are considered fair. Below 620, the risk is too high for lenders to approve applicants for a loan.
If my score is fair, can I get a loan?
There are certainly instances where mortgage lenders might accept a fair credit score. The loan will cost the borrower more, but it can still happen. Several types of government-backed loans might be available to you if your score is in the range considered “fair”.
FHA Home Loans
FHA Home loans are insured by the government and provided by FHA-approved lenders. The Federal Housing Administration requires a minimum score of 500 and requires a 10 percent downpayment. If your FICO score is 580 or above, your downpayment requirement drops to only 3.5 percent. For those with a low credit score, FHA loans can be a good option, but it can often cost you more in the long run, and you’re required to buy mortgage insurance to guard against foreclosure.
VA Home Loans
VA home loans are a government benefit available only to eligible active military members, veterans, some surviving family members, Reservists and the National Guard.
VA loans are home loans available to those who have served in the U.S. military and their family members. These loans do not require a downpayment and do not require borrowers to purchase mortgage insurance. Government-approved lenders each set the required credit score minimum, and many will accept a score of 640.
Conforming mortgages are loans that meet dollar guidelines set by Fannie Mac and Freddie Mae. The maximum amount allowable for theses loans can vary from year to year. For a conforming mortgage, borrowers must meet a specified debt-to-income ratio and have a score of at least 620. The downpayment required is 20 percent or higher, and the interest rate will vary, depending on the borrower’s actual FICO score.
USDA Home Loans
A USDA home loan is offered by the US Department of Agriculture and is available for rural properties. The guidelines of what is rural are set by the USDA, but often do include suburban areas. To qualify for these loans, borrowers must meet income requirements and have good credit history, with a score of at least 640. Often these loans do not require any downpayment, and offer very low interest rates.
ALT-A and NON QM Loans
Non QM, or non qualifying mortgage loans are those which do not comply with Qualified Mortgage rules. Lenders who offer these loans set their own requirements for borrowers and therefore can offer loans to borrowers that don’t meet requirements set by other traditional lenders. Borrowers with low credit scores can be eligible for these loans, but will usually pay much higher interest rates than those with traditional mortgages.
For credit union members, these can be an excellent source for a home mortgage. Credit unions offer loans according to their own standards, and don’t usually set a minimum credit score to qualify for a home mortgage. These loans are often available to members with a low income and a less than excellent credit score.
In addition to requirements set for borrowers with FHA, VA and other government-backed loans, lenders can add their own requirements to the loan to minimize their risk as they see fit. Some lenders may overlay requirements like a higher interest rate, or additional cash reserves, in order to approve a borrower. Borrowers have to keep in mind that each lender is different and can determine the credit score requirements beyond what is typical for these loans.
If your score is less than stellar:
If your FICO score is low, your mortgage application might have a better chance of approval if you can make yourself a more attractive borrower in other ways. One is to offer a larger downpayment. A downpayment of over 20 percent will reduce your mortgage payments and reduce the lender’s risk. Another financial boost would be if you have extra cash reserves. Lenders view it as positive if you have savings of the amount equal to six months of mortgage payments, to help assure them that you won’t fall behind.
Borrowers who want to improve their chances can also work to reduce their debt-to-income ratio. Most lenders look for a ratio of under 40 percent, so work to pay down debt until you reach that number. Another helpful factor is if your new mortgage payment remains about the same as what you’ve been paying for your current mortgage or rent. In this way, lenders view that the new mortgage will not cause payment shock, since it is comparable to what you already used to budgeting.
If you’ve been denied a mortgage loan, most lenders can give you tips on how to improve your chances of acceptance in the future. You can put their advice into action and apply again. It is not uncommon to apply to several lenders before finding one that is right for you. No matter your score, there is often a lender that is willing to work with you to find the right kind of loan to suit your financial situation.