When it comes to your credit score, how low is too low? The number you really need to buy a house.
We all know that when it comes to buying a house, there are a few things we need, like a down payment and a good enough credit score to qualify for a loan. But what does a “good enough credit score” really mean? Does your credit history have to be impeccable? Can you have a couple of boo-boos? And, if you do have issues on your report, how much of a hit will you take?
Your credit score is “a number, roughly between 300 and 850, that summarizes a consumer’s creditworthiness,” said Bankrate. “The higher the score, the more able and willing a consumer is to repay a loan, lenders believe. The best mortgage rates and terms go to borrowers with credit scores of 740 and higher.”
But most of us can’t measure up to that number. Thankfully, we don’t have to. There’s room for lower scores – even really low scores – depending on the type of loan you’re applying for, with a number of other factors (your income and work history, the amount of your down payment, the state of the economy) thrown in. Knowing where the bottom is will help you figure out how to proceed.
The advantage to a Federal Housing Administration (FHA) loan for many buyers is the low down payment. You may need only 3.5% down to purchase a home with this type of loan, which is backed by the government. But, you’ll need a minimum 580 credit score if you’re only planning to put 3.5% down. Can’t meet that benchmark? You’ll need more cash up front.
“If your credit score is below 580, however, you aren’t necessarily excluded from FHA loan eligibility,” said the FHA. “Applicants with lower credit scores will have to put down a 10 percent down payment if they want to qualify for a loan.”
For FHA loans, your credit score can be as low as 500. But, “Those with credit scores between 500 and 579 are limited to 90 percent LTV,” which leaves a lot of people out of luck.
The issue with FHA loans for many buyers: That pesky private mortgage insurance (PMI), which can add several hundred dollars to the monthly payment and is “required any time you put less than 20% down on a conventional loan,” said My Mortgage Insider.
If you have a larger down payment, you may be able to avoid paying PMI by going with another type of loan – but only if you have the credit score. “To qualify for a conventional mortgage, a borrower generally needs a minimum credit score of 680 and at least 5 percent down,” said Bankrate. “Many lenders require at least 10 percent down.”
There may be more wiggle room in that credit score if you can come up with more money for a higher down payment. But, if it’s too low, you’ll likely be pointed right back to FHA loans. On the other end, a higher score will get you the best possible interest rates.