When embarking on the journey to finance a home purchase, it’s crucial to understand what mortgage lenders look for when assessing potential borrowers. One significant factor they consider is your credit score, which measures your creditworthiness. Lenders find higher scores more attractive. FICO and VantageScore, two prominent credit scoring companies, use a range of 300 to 850, with higher scores being more favorable. So, what if your credit score falls slightly below the ideal range? Can you still buy a house with a credit score of 700? Let’s delve into the recommended scores for different mortgage loans and explore the possibilities.
To evaluate loan applications, mortgage companies primarily consider credit score, income, assets, and payment history, as explained by Ralph DiBugnara, a senior vice president at Cardinal Financial and the founder of Home Qualified. Your credit score has the most significant long-term impact on the interest rate you’ll receive as a borrower. Therefore, a good credit score holds great importance. While FICO and VantageScore scales differ slightly, a credit score of 700 is considered good by both companies. Here’s how they breakdown the range:
– FICO
– Excellent/Exceptional: 800–850
– Very Good: 740–799
– Good: 670–739
– Fair: 580–669
– Poor: 300–579
– VantageScore
– Excellent/Exceptional: 781–850
– Good: 661–780
– Fair: 601–660
– Poor: 500–600
– Very Poor: 300–499
Although a credit score of 700 might not be at the very top of the scale, it should not disqualify you from major home financing options. In fact, DiBugnara believes that a credit score of 680 or above grants borrowers access to 95% of financing options available.
So, what types of loans can you get with a credit score of 700? A FICO score of 700 exceeds the minimum requirement for most home loans, including jumbo loans for more expensive properties. Here’s a breakdown of the loan options:
– Conventional Loan: Conforming loans usually require a minimum credit score of 620 for fixed-rate mortgages and 640 for adjustable-rate mortgages. However, to secure the most preferred interest rates and terms, a credit score of 700 or above is advisable.
– FHA Loan: This type of mortgage, guaranteed by the Federal Housing Administration, has lower minimum credit score requirements compared to many conventional loans. It is particularly popular among first-time homebuyers. A credit score of 500 is acceptable with a 10% down payment or higher, while a score of 580 or higher allows for a down payment of at least 3.5%.
– VA Loan: Active-duty military service members, veterans, and surviving spouses may be eligible for a VA home loan. While the VA does not set a minimum credit score requirement, lenders may have their own standards. Typically, a credit score of 620 or higher is necessary to secure favorable VA loan terms.
– USDA Loan: Backed by the U.S. Department of Agriculture, this loan focuses on eligible rural regions. Generally, a credit score of 640 or higher is required.
– Jumbo Loan: Jumbo loans cater to borrowing needs that exceed conforming loan limits. A minimum credit score of 700 or higher is usually necessary for such loans.
Your credit score directly impacts the affordability of a home you can purchase. Lenders view low-risk borrowers more favorably and are more inclined to offer them lower interest rates, resulting in lower monthly payments over the loan’s duration. With a credit score of 700, you should be able to buy a house. However, your total loan costs can vary significantly compared to a higher credit score, such as 760. Let’s consider an example using a $300,000, 30-year fixed-rate mortgage loan. According to FICO’s Loan Savings Calculator (as of mid-August 2023), a credit score of 700 could secure an interest rate of 6.796%. In this case, your monthly payment would be $1,955. However, with a credit score of 760, which qualifies for the best interest rate available at 6.574%, your monthly payment would be $1,911. Although a $44 difference per month may not sound substantial, it amounts to an extra $15,840 paid in total interest over 30 years. On the other side of the scale, a credit score of 620, the minimum needed for a conventional loan, significantly increases the monthly payments to $2,235.
Improving your credit score before applying for a home loan is undoubtedly worthwhile. Here are several strategies to raise your credit score:
– Pay your bills on time, including not just credit card bills but also rent, utilities, and even cell phone bills.
– Pay down your outstanding debt, aiming to lower credit card balances to below 30% of the credit limit on each card.
– Avoid opening new credit accounts frequently, as each application triggers a hard inquiry on your credit report, which can negatively impact your score.
– Avoid closing existing accounts, particularly old accounts that have been paid off. The length of your credit history influences your score, and keeping these accounts open can have a positive effect.
– Regularly review your credit report and address any errors or discrepancies you identify.
Implementing these tactics at least six months before applying for a mortgage loan is advisable to allow sufficient time for their impact to be reflected in your credit score.
If your credit score falls short of ideal, it might be wise to wait before purchasing a house to give yourself time to improve it and set yourself up for lower payments. When you’re ready to start your house-hunting journey, partnering with a local real estate agent early on can be highly beneficial. A knowledgeable agent familiar with your specific area can guide you throughout the homebuying process and help you find a home that meets your needs and budget.
FAQs:
– Can I buy a house with a 700 credit score? Yes. Assuming your overall financial situation is solid, a credit score of 700 should qualify you for all major loan programs, including conventional, FHA, VA, USDA loans, and even jumbo loans (which typically require a minimum credit score of 700).
– Is now a good time to buy a house, or should I wait? The optimal time to purchase a home is when you are financially ready and can demonstrate creditworthiness, as reflected by your credit score. If you have stable employment and consistent earnings, you should be well-positioned to make a purchase.
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