Credit Scores and Mortgages 2020
Mortgage rates are at historic lows and people are rushing to take advantage. Many people are looking to buy a new home, whereas others are looking to refinance their current home. Wherever you fit it, there might not be a better time than right now to lock in low interest rates for the duration of your loan. In spite of this incredible opportunity to get a new mortgage, many people are still sitting on the sidelines.
Some people are worried that they do not have a large enough down payment. In a previous post, we covered why you should not be scared off by the myth of the 20% down payment. Some of you might be concerned about your credit score. The truth is that you do not need perfect credit to secure a mortgage. You do not have to let these historically low rates pass you by. The team at People’s Choice Mortgage is here to breakdown some of the basic things you need to know about credit scores and applying for a mortgage.
What are Credit Scores?
Credit scores are used by lenders to determine the likelihood a potential applicant will pay back their loan. There are a few different models used to come up with a credit score. The two main types of credit scores are the FICO score and the VantageScore. Your credit score is calculated by three main credit bureaus. These three main bureaus are Experian, Equifax, and TransUnion. The big difference between your FICO score and your VantageScore is which bureau they use. Your FICO score is determined based on your score from one of the bureaus. Different lenders will rely on different bureaus if they use your FICO score. VantageScore gives lenders a credit score based on data from all three credit bureaus.
How are Credit Scores Determined?
Whether a lender uses your FICO score or VantageScore to evaluate your credit, the same factors are used to get the magic number. There are five main factors that go into your credit score:
Payment history: Having a long track record of consistently paying your bills on time greatly impacts your credit score. Lenders want to make sure you will make your payments if they give you a mortgage. Late payments will adversely impact your credit score.
Length of credit: The longer you have had credit, the better. It gives lenders a longer timeframe for them to judge if they think you are a good risk.
Types of credit: There are three different types of credit accounts. These accounts are revolving, installment and open accounts. One type of account is not necessarily better than the other. Instead, it is ideal to have a balance of the different types of accounts. However, this is one of the least influential factors in determining your credit score.
Credit usage: This measures how much of any line of credit you are using at any one point in time. If you consistently have a balance on your accounts that is close to the limit, your credit will be impacted. Paying down the balance on your accounts will improve your credit.
Recent inquiries: Inquiring about new lines of credit can impact your credit score. Applying for a lot of credit accounts in a short period of time can lower your score. Do not be frivolous with applying for credit. Make sure you have a specific purpose and a plan to pay off the account.
What Credit Score Do I Need to Qualify for a Mortgage?
The short answer is that it depends. Different lenders have different standards for what type of credit score they will accept. This is why it is important to work with an experienced mortgage broker. Experienced brokers have a large network of lenders they work with. As experienced brokers we know what lenders are best for you based on your current credit score. Some lenders only work with individuals who have good to great credit scores. However, some lenders specialize in providing mortgages to people with lower scores.
The typical score you need in order to qualify for a conventional mortgage is around 620. However, this varies from lender to lender. You can still qualify for a mortgage with a credit score lower than 620. You can either get a subprime mortgage or you might qualify for one of the special programs offered through the federal government.
There are a number of different programs offered through the federal government that can allow you to qualify for a mortgage without having a good credit score. Here are a few of the programs:
FHA Loans
FHA loans are mortgages that are insured by the Federal Housing Authority. These loans are typically available to first time homebuyers. You can either get an FHA loan with a 3.5% down payment or a 10% down payment. These loans still go through private lenders, so the specific score you need will vary. Generally, you need a credit score of 580 or higher to get a loan with 3.5% down payment. With a 10% down payment you can qualify for an FHA loan with a score as low as 500. Again, all of this varies from lender to lender, so it is important to work with an experienced broker.
VA Loans
VA loans are backed through the US Department of Veterans Affairs. These loans are available to active duty service members, veterans, and qualified spouses. If you meet the requirements for a VA loan there is no minimum credit score requirement. However, private lenders set their own limits. Which means it is important to work with an experienced broker who knows the policies for a variety of lenders.
The bottomline is that you do not need perfect credit to qualify for a mortgage. Mortgage rates are at historic lows and you should not disqualify yourself from one before you have even spoken with a mortgage professional. Experienced brokers have lots of lenders they work with and might have something for you, no matter your credit score. At People’s Choice Mortgage we always are doing our best to find a way to make people’s dream of homeownership a reality. If you would like to see what loans are available to you, please contact us now. Mortgage rates will not be this low forever. Do not deny yourself the dream of owning a new home or refinancing your current home. Let our team of professional loan officers try and find a loan that works for you and your finances.
