Different Types Of Mortgage Loans & The Credit Score Needed
Updated: Mar 22
Your credit score is the most important thing when learning how to handle your finances. Do you ever wonder what it would be like to have a credit score over 800, and to be able to get any loan you want and have any lender trust you? Yeah, I think that all the time.
But the thing is, that could be you. You may not get there quick, but you can definitely make changes to your finances that will help you get a mortgage. There are different types of mortgage loans out there and different way to qualify.
Getting a mortgage can be kind of scary. What’s even more scary? Getting rejected because you don’t have a high enough credit score. So, what credit score is used to buy a house? What can you do to improve it to get there? How long will it take to get there? These are all questions we’re going to dive into in this post.
Determine What Type Of Mortgage You Should Get
There are different types of loans you can get based on what your needs are and what your credit situation is. So, what kind do you need? That’s what we’re going to answer.
To blatantly list the kind of loans one might qualify for, they are:
· Conventional Loans
· FHA Loans
· VA Loans
· USDA Loans
All of these actually depend on where you live and the kind of house you buy and your credit score, of course. They all have different and similar variables, and before getting a loan you want to make sure you understand what those variables are that may cause you to get a less desirable loan or rejected all together.
So, what kind of credit score is required for these? Let’s find out!
Minimum Credit Score For A Mortgage
I know you may not love this answer, but it depends. I hate it too, trust me. But when getting a loan, it totally depends on the lender you go through and what standards they have for mortgages.
If a loan is unconventional (FHA, VA, USDA), then a minimum credit score for 2020 into 2021 for FHA is 580, VA is typically 660, and USDA is around 660 as well that most lenders look for.
Conventional loans are a bit tougher to obtain, but credit scores are dependent on the lender you go through. The credit score requirements are stricter. Typically, the minimum is about 620, but this depends on how much of a down payment you make. The larger a down payment, the lower the credit score has to be.
Some mortgages have a minimum credit score because they are insured and backed by the government. These are considered unconventional loans. Conventional loans are not backed or insured by the government. According to Dave Ramsey, “A conventional loan is a deal between you and a lender that meets Fannie Mae’s underwriting guidelines…”.
Now that we've discussed what credit scores are needed, let’s dive deeper and find out what the different types of mortgages are and which one is best for you!
As mentioned previously, conventional loans are a deal between you and a lender. After interest and fees, a conventional loan might be less expensive. You should try to understand the conventional mortgage requirements also.
A downfall however is that a lender might require a higher down payment, and private mortgage insurance, or PMI. Private mortgage insurance is insurance that protects the lender if the buyer defaults on their loan payments.
A down payment on conventional loans is 5% and according to Rocket Mortgage, “PMI, like other types of insurance, is based on insurance rates that can change daily. PMI typically costs 0.5% – 1% of your loan amount per year.”
You can get around the PMI if you make a down payment of at-least 20% or more. So, on a $100,000 mortgage, 20% would be $20,000. It’s a lot of money, but it gets rid of the PMI.
First time homebuyers can often get better deals when buying a home and may only be required to put down 3% on a conventional loan. The size of your loan also has limitations. For a conventional loan, in 2021 the maximum is typically $548,250 but can vary from county to county. Conforming loans are backed by Fannie Mae and Freddie Mac, but can’t exceed FHFA loan limits.
Here is an amazing tool you can use if you want to find out if your house qualifies for the loan limits of conventional loans.
FHA stands for Federal Housing Administration. The qualifications are different for this type of loan than that of a conventional loan. FHA loans typically require a minimum credit score of 580 and 3.5% down. So, it does have a lower down payment requirement, but it still requires MIP. MIP stands for mortgage insurance premium and is similar to PMI.
The downfall for MIP is that it requires at-least a down payment of 10% or 20% equity in the home, but even then, you’re still required to pay MIP for the first 11 years even with 10% down.
So, with an FHA loan you might be spending more money in the long run than a conventional loan. Find out more on how the MIP rates are determined here.
VA loans are for those that have served in some form of the military. So, if you have served in the military, this type of loan might be for you. VA loans don’t require a down payment, but does come with a funding fee. The funding fee changes from year to year, but can range from 1.25% to 3.3% of the loan amount.
USDA mortgages are zero down payment loans for rural and suburban homebuyers. Similar to a VA loan, USDA loans do not require a down payment, and are great for not so wealthy couples and individuals.
The biggest downfall is that these loans are essentially income based. So, you want to make sure that certain properties qualify as a USDA property, and that you qualify as well. USDA loans are meant to help low-income families. To help see if you would qualify on income limitations, check out this helpful website and select your state and find your county.
Can You Buy A House With Bad Credit?
To buy a house with bad credit, there are many factors you have to consider. We suggest getting a free credit report first and looking to see what’s on there and then determining what needs to change in order to appreciate your score or if you might still qualify.
Everyone’s entitled to one free credit report from each major credit bureau. To get yours, go here and follow the steps. It is completely secure and doesn’t take long to get access to your free credit report.
Now, can you buy a house with bad credit? The answer is really based on the lender and if you meet the credit score qualifications discussed previously. If you don’t meet those qualifications, then the chances are slim, but still possible. If you’re able to put more money down, this will increase the odds of approval by a lender.
So, find out your credit score, and then find out if you would possibly be able to put more down on home loan to get approved. If you just don’t qualify, an alternative is to get an apartment and live there if possible until you get a higher credit score. Or consider staying wherever you are now and building up a bad credit score.
How To Improve Your Credit Score
If your credit score is too low to qualify for any mortgage, or even just the mortgage you desire, then take some time to rebuild it. It is still possible to rebuild a bad credit score. It may take some time, but depending on what’s on there, you may be able to rebuild a better score faster than most or a bit slower than most. The idea is to not get discouraged. Read our blog post here to find out more ways to boost your credit score fast.
Pay Off Debt
If you have excessive debt, either credit cards or loans, then try hard to pay them off ASAP! It can take a while but slowly your credit score will improve over time from your on-time payments and because you pay more than just the minimum due. Excessive debt can depreciate your credit score, so consider paying off what you can to help it grow.
This is a fantastic tool that was made available by Experian. It allows anyone to sign up with their information and get a boost on their score. It varies for everyone, but the boost it gives might just be enough to help you qualify for that loan you want and get you the house of your dreams. Check it out here!
Keep Your Credit Cards Paid Down
The more debt you have on your credit cards, the more your credit score may go down. Credit cards a great for building your score but be careful not to add too much debt on them without paying them down consistently.
Typically, lenders like to see no more than 30% utilization of your credit. Using more than this can depreciate your score. And remember to always make more than just the minimum due. Even if it is only $5 more than the minimum.
Don’t Have Too Many Credit Inquiries
Too many inquiries for loans or credit cards can also hurt your credit score. If you get denied on one application, don’t keep reapplying. Consider why you got denied, and work to improve it. Then further down the road you can try again.
We hope you learned a lot about mortgages and the credit scores that come with them. If you’re considering buying a home, before applying, always get your free credit report first and consult with a financial advisor to see any recommendations before applying. This may help with you not getting denied too many times.
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