goodluz / Shutterstock.com
Your credit history is one of the most important factors lenders consider when deciding whether to approve you for a mortgage loan to purchase a home. Would-be borrowers with bad credit can have a tough time getting a loan, but it might be possible to be approved despite a low credit score.
What Is the Minimum Credit Score To Buy a Home?
Exact credit score requirements vary by loan type and lender, but the following guidelines will give you a good idea of what to expect:
- Conventional loan: 620
- Jumbo loan: 700
- VA loan: No minimum imposed by VA, but lenders usually require a minimum score of 620
- FHA loan: 500 with 10% down payment; 580 with 3.5% down payment
- USDA guaranteed loan: No minimum imposed by USDA, but lenders usually require a minimum score of 640
Good To Know
Your credit score isn’t the only credit factor that affects your mortgage application. You’ll also need a recent history of on-time payments. It’s better to have a lower score with no late payments in the last 12 months than to have a higher score with recent late payments, according to Gustan Cho of Gustan Cho Associates Mortgage Group.
How To Buy a House With Bad Credit
You can make yourself a better credit risk in the eyes of potential lenders by setting the numbers up in your favor.
1. Plan To Pay at Least 20% Down
A sizable down payment increases your stake in homeownership and reduces the risk that you’ll default on your loan. Putting down at least 20% also lets you avoid mortgage insurance, which protects lenders in case borrowers default but adds a monthly premium to your mortgage payments and costs you extra at closing, according to the Consumer Financial Protection Bureau.
2. Build Up Cash Reserves
You’ll want to save up at least two months’ worth of home payments, including principal, interest, taxes and insurance, but some lenders require as much as six months’ worth for riskier borrowers. Cash reserves include bank accounts, stocks and bonds and vested funds in retirement accounts and life insurance policies — money you can withdraw quickly in a pinch.
3. Lower Your Debt-to-Income Ratio
Mortgage lenders want you to have a lower debt-to-income ratio because you’re more likely to fall behind on mortgage payments if you’re already juggling other debts. To determine your DTI ratio, add up your monthly debt payments and divide that number by your gross monthly income. …….