What Credit Score Do You Need to Qualify for a Home Loan?

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Before beginning the house-shopping process, it is important for prospective home buyers to do their due diligence and figure out what kind of loan they qualify for. Many people understand that credit is a factor in the home loan application process, but do not know exactly how it affects it. It is crucial that homebuyers understand exactly how their credit score plays a role in their home loan.

Here at The Reichert Mortgage Team in Colorado Springs, we want our clients to understand as much as possible when it comes to the home loan process. Setting up explanations to common questions about credit and home loans is just another way we strive to serve our El Paso community! 

What is A FICO Score?

Before jumping into how a credit score affects a home loan, it is important to briefly go over what a credit score is. A FICO score, also known as Fair Isaac Corporation, credit score is the most commonly used factor that lenders utilize to help them determine rates on the loans they offer to different clients. It is called a Fair Isaac Corporation or FICO because they are the corporation that created the FICO credit score lenders use. 

The FICO credit score is calculated by a few different factors such as;

  • Payment history towards credit. 
  • Amount owed on lines of credit. 
  • Length of credit history. 
  • New credit. 
  • Varieties of credit a person has open. 

These various factors are built up over time by every individual who has credit cards or loans. This score is monitored by three companies: Equifax, Experian, and TransUnion. The higher a score is, the better.

My Credit Score and Home Loan

Now that a basis of what the FICO credit score is has been established, we can move into how it affects the home loan process. At this point you may be asking “what credit is needed for a home loan?” or “how does credit factor into a home loan?” These are excellent questions to have at this point. With any loan, car or home, the higher your score is, the better rates you will get. For home loans specifically, these are called mortgage rates. 

Mortgage rates are the percentage of interest that you will pay back over time. The better your credit score, the lower the interest rate. As an example, someone with excellent credit of 760+ may qualify for an annual percentage rate of 2.7% whereas some with a lower credit score of 620 may qualify for an APR of 4.1%. It may not seem like a huge difference, but over a 30 year mortgage that can mean a discrepancy of thousands of dollars. 

Can I Qualify For A Home Loan With A Bad Credit Score?

Many people often wonder if they will qualify for a home loan with bad credit score or if they can even apply for a home loan with a bad credit score, especially first time home buyers in Colorado. Generally, it is better to raise your credit to one of the limits mentioned above before applying for any type of home loan to avoid not qualifying. So if you are looking to buy a home soon, start working on building your credit score up. 

Credit Score to Buy a House 2021

Depending on what type of home loan you are looking into, the credit score requirement does change. For a conventional loan, the expected credit score is at least 620, whereas a FHA loan ranges from 500-580 depending on the lender. VA loans are a bit different as there is no credit limit, however most lenders look for a 620 or above. These are relatively standard FICO credit scores in regards to home loan qualification and remain the same each year. 

The one thing that can change is if FICO opts to change how credit scores are calculated like they did in January of 2020. In this situation individuals’ scores were adjusted to reflect the change, and if the adjustment was severe enough it could affect the home loan application process. FICO does this every five years or so. 

Credit Counseling and Your Path to Homeownership | The Reichert Mortgage Team

Now that we have answered the questions of “how much credit is needed to buy a house?” and “how does credit affect home loans?” you have some insight on how home loans and credit relate to each other! Here at The Reichert Mortgage Team we offer credit counseling for people who want to take the first step toward refinancing their home or buying a home for the first time. Schedule your appointment today to get started on your home loan journey.

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