by Christine DiGangi
Buying a home may no longer be the American Dream (now people just
want to get out of debt someday), but it’s still a huge goal for many.
But if you don’t have a good credit score, that dream might go up in
flames.
A lot of things factor into getting a mortgage,
but it starts with your credit score. If your credit score isn’t good
enough, nothing else matters. Depending on the loan program, lender and
an applicant’s specific credit history, the minimum credit score
necessary to buy a home varies. Heather McRae, a senior loan officer for
Chicago Financial Services, said 580 is the lowest score she’s seen in
recent loan approvals, and she hasn’t seen anything lower than that in a
long time.
A 580 is a bad credit score (on the often-used scale of 300 to 850). A 600 credit score isn’t the best credit score,
either, but that’s generally considered the minimum for an FHA-backed
loan, said Scott Sheldon, a senior loan officer at Sonoma County
Mortgages. FHA loans are popular among first-time homebuyers and have a
minimum down payment
of 3.5%. If you’re going for a conventional loan (one not backed by a
government agency), the minimum credit score is 620, McRae and Sheldon
said.
Those minimum scores are just that — they get your foot in the door.
But mortgages are complicated and require a lot of paperwork, so if
you’re barely squeaking in, you can expect a rough ride. Take that
600-minimum on a 30-year fixed-rate FHA loan.
“You’re going to have a lot — I mean, a lot — of hoops to jump through,” Sheldon said. “It’s going to be very unpleasant.”
For people with lower credit scores, a down payment plays a huge
factor in approval. McRae said a 20% down payment and a 620 credit score
should get you a loan, but a smaller down payment will tighten credit
standards.
“680 is kind of like the unspoken minimum, but you can definitely get
something done below that,” she said. “If you’re under a 680 credit
score, the mortgage insurance premiums get pretty steep.” Loans with
less than a 20% down payment require mortgage insurance, which you can
sometimes get rid of later.
Sheldon also said 680 is the unofficial minimum.
“680 would be the goal, the credit score to strive for if you want to
have choice and flexibility,” Sheldon said. If you’re already close to a
680, he said to aim higher for even better loan terms. “You really want
your score in the 740 range to get optimal pricing on any given day.”
There are home loans
for people with a variety of credit scores, but with a financial
decision of this size, it helps to set yourself up for the most
affordable terms possible. If you’re thinking of buying a home at any
point in the future, start preparing for the mortgage process now by
building a good credit score. It can take awhile, especially if you had
credit problems in the past, but there are many ways to rebuild your
credit and position yourself to buy a home someday.
As you work on improving your credit, you can see how you’re doing by looking at your two free credit scores every month on Credit.com. Make sure you’re looking at your free credit reports each year,
too, at AnnualCreditReport.com, because sometimes errors can be
dragging your score down — and you need to find them to fix them.