A home buyer’s credit is the primary piece of information a lender will review when an application for a home loan has been submitted. In many cases, it is the one thing standing between a person and homeownership.
Many hope to be approved for a home loan, but buyers should make sure they know what credit score needed before they apply for a mortgage.
How does my credit score affect my eligibility?
Lenders are taking a risk when they decide to approve someone for a home loan. Buying a home is expensive, and before a buyer can be given thousands of dollars to purchase their dream home, lenders need to obtain information about the buyer’s creditworthiness and assess how risky it would be to lend money to that buyer.
Each lender will have a set criterion that borrowers are expected to meet, and this criterion will often include a minimum credit score. Lenders tend to review a buyer’s FICO credit score as part of the loan application process. FICO credit scores range between 300 and 850.
Each person’s FICO score is calculated using a particular set of data obtained from the three credit bureaus, Experian, Equifax and Transunion. This data will provide information regarding the person’s:
- Open accounts
- Types of accounts or credit mix
- Length of credit history
- Payment history.
Generally, the higher the credit score, the better. Not only does this increase a buyer’s chance of loan approval, but it will also grant them access to the lender’s lowest mortgage rates. Since the mortgage rate has the potential to increase the total cost of the loan, lower rates are preferred.
Lenders like to see credit scores between 740 and 850 because this is proof that the buyer is dependable, making them low risk. However, credit scores between 580 and 739, are still acceptable scores to many lenders.
Buyers should note that although FICO scores are commonly used, lenders may review individual credit reports from Experian, Equifax and Transunion when assessing risk.
What if I have bad credit?
Bad credit doesn’t necessarily disqualify someone from being eligible for a home loan, but if a buyer has a lower credit score, less than 580, getting approved for a loan can be a bit tricky. Additionally, a low interest rate may be out of the question. Luckily, there are many lenders who are open to lending to buyers with bad or poor credit because the type of home loan the buyer applies for can also affect their eligibility.
For example, if a buyer were to apply for a conventional home loan with a minimum credit requirement of a 650, they would be denied if they have a credit score of 600. However, if the lender also offers an FHA loan, this type of loan has a minimum credit requirement of 500. Since this loan is designed for buyers with lower credit scores, the odds of approval are high.
Before applying for a loan, buyers should review lending criteria to determine if they meet the minimum credit score requirement. With a hard inquiry having a negative impact on the buyer’s credit score whether they are approved for the loan, it is best for them to ensure all of the eligibility requirements are met before submitting an application.
A credit score is more than just a number. When it comes to approving home buyers for a mortgage loan, lenders rely on the buyer’s credit score to determine if it would be risky to lend to that buyer. While there are home buying options available to those of varying credit profiles, buyers should aim to improve their scores before applying for a home loan.