If you’ve never purchased a home, it’s easy to assume that the current market demands credit score perfection. After all, there’s a housing shortage in the U.S. and affordability has dipped to levels not seen since 1984. In this environment, you might assume that you need both a high income and a higher credit rating to climb onto the property ladder.
But if that’s what you believe, think again. In fact, the minimum score needed to get a mortgage approval is likely much lower than you’d expect. That doesn’t mean the score is irrelevant — but it certainly doesn’t equal an insurmountable barrier.
Here’s a closer look, if you will, at the true score.
Minimum credit scores
All banks that offer home loans have different credit score thresholds. These vary but in general, the minimum required for a conventional mortgage is 620, analysis by QuickenLoans shows. Yet it’s still possible to land a home with a score in the 500s, says Quicken.
Most Americans have better credit scores than that. According to analysis of FICO data by credit reporting company Experian, the average U.S. consumer has a credit score of 714 — well above the threshold required for most conventional lenders and considered “good.”
Does this mean most Americans can access mortgages easily? Not exactly, because credit scores primarily impact the interest rate lenders offer to borrowers. In other words, a higher credit score translates to lower rates on a typical mortgage. But your high credit won’t change much if you can’t afford a home because you don’t have a high enough income or sufficient savings.
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A credit score below 620 doesn’t mean you can’t access mortgages: It just means you can’t access conventional mortgages. Other options for borrowers include loans insured by the Federal Housing Administration (FHA loan), U.S. Department of Veterans Affairs (VA loans), or the U.S. Department of Agriculture (USDA loans.)
You could also access mortgages financed by private lenders.
The exact score you need depends on the size of your down payment and loan. Your minimum score could be as low as 500 for a FHA loan that requires 10% down payment. But bear in mind, it does mean your mortgage may be more expensive over the life of your loan. A borrower with an exceptional credit score between 760 and 850 can get a 30-year fixed rate mortgage of $300,000 at an average rate of 7.550%, according to FICO. By comparison, someone with a credit score between 620 and 639 would be offered a much higher rate of 9.139%.
Which is why, before you’re ready to make a purchase, it’s worth trying to improve your credit score. Check your credit reports for errors or reach out to a debt management firm to rebuild your credit score. Alternatively, you could save for a larger down payment or ask someone to co-sign your mortgage to get your foot through the door.
Several down payment assistance programs are also available, depending on where you live or how much you earn.
Don’t let your credit score discourage you from accessing essential housing for you and your family. The numbers, after all, can change if you take charge.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.