People’s lives are run by scores, from GPA scores at school to scores on a driving test. After we leave school and start adulting, the most important scores for most of us are our credit scores. There are many benefits to having a good credit scores, from getting a car loan to getting a mortgage, and certainly to get those at a good rate. But what happens when your credit score has had a few dings? Can you get a mortgage with a low credit score?
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Understanding Credit Scores
There are few types of credit scores, and the most popular ones are Vantage Score and FICO score (FICO bankcard score, FICO auto score, FICO personal finance score, and FICO installment loan score) which were designed by a publicly-traded data analytics company “Fair, Isaac and Company” based in San Jose, California in 1956.
The score that is most relevant for a homebuyer is the FICO score. Understanding the FICO score is important as it is one of the most commonly used credit scoring models in the United States. FICO scores range from 300 to 850 and are used by lenders to assess an individual’s creditworthiness.
The score is calculated based on various factors such as payment history, credit utilization, length of credit history, types of credit used, and new credit applications. A higher FICO score indicates a lower credit risk, making it easier for individuals to qualify for loans and obtain favorable interest rates.
How Does a Lender Know My Credit Score?
When applying for a mortgage, a lender will request an e-consent from you to do a hard pull on your credit. The hard pull will lower your score slightly, by a few points. The impact is usually minimal and temporary, as credit inquiries typically have a small effect on your overall credit score. However, multiple inquiries within a short period of time can have a more significant impact. It’s important to note that checking your own credit score does not affect your credit score.
To qualify for a mortgage, mortgage lenders need a tri-merge score from 3 credit bureaus (Experian, Transunion, Equifax) and they will use your mid score as a qualification factor. If a person applies for a loan with a co-borrower, Fannie Mae allows the two middle scores to get averaged on conventional loans.
Is 600 FICO is a Bad Credit Score?
Based on the below list, a 600 FICO score is a Fair score, which can still get you into a house based on Fannie Mae or Freddie Mac guidelines. It falls within the range of 580-669, which is considered to be fair credit. However, it is important to note that lenders may have different criteria and requirements, so it is always best to check with them directly.
- 800-850 – Exceptional Score, only 21% of people in the U.S
- 740-799 – Very Good – 25% population in the U.S
- 670-739 – Good, 21% and they can still qualify for any loan
- 580 – 669 – 17% of people and banks with mortgage overlays will most likely deny the loan
- 300 – 579 – 16% of people in the U.S. – If your score is over 499 you might still qualify, if less than that, no bank will lend you money.
Minimum Credit Score Requirements for a Mortgage
Different types of mortgage loans have different requirements. For example, to qualify for a conventional loan you need at least a 620 FICO score. A USDA loan normally requires credit scores of 640 or higher. While the VA doesn’t set any specific standards for a qualifying credit score, lenders set their own policies based on their risk tolerance.
To qualify for an FHA loan, you need FICO at 500 or more. If your score is below 580 you will need to go through a manual underwriting process (your loan will be manually underwritten by an underwriter). In this case, you will need to provide compensating factors and sometimes write an explanation letter describing your unique situation. The highest credit score you need for Jumbo loans, below are exact limits in Maryland for FHA and conventional loans in high-cost areas.
High-Cost Areas in Maryland and Jumbo Loans
It’s important to understand conforming and FHA loan limits and how they work when your credit score is less than you would like. FHA loans have less strict credit score requirements than conventional loans. If the loan amount is higher than conforming limits, it’s a jumbo loan that has the strictest credit score requirements.
Peter Beeda from FHA Lend says: “To qualify for a Jumbo loan you need to have a score of 660 or above with the current market and based on over 160 investors we have. To get the conventional loan you need at least 620 FICO”. The FHA loan is most forgiven and you can qualify with 500 credits when you at least 10% as a down payment.
To summarize, If your loan amount is over maximum conforming limits, you need to go with a Jumbo Loan and have a 660 credit score or above. There are four high-cost areas in Maryland state: Counties which has higher maximum loan amounts are Anne, Baltimore, Baltimore City, Carroll, Harford, Howard, and Queen. The maximum conforming loan for a single home family is $647,200 and for an FHA loan is $583,050.
You can borrow up to $970,800 in Calvert, Charles, Frederick, Montgomery, and Prince George’s County when applying for FHA or Conventional loan.
In Cecil County, Conventional loans are equal to $647,200 and when going with FHA financing you can borrow up to $477,250 for a single home family based on FHA limits in Maryland set by Federal Housing Administration.
In Talbot County in Maryland, a lender can lend up to $647,200 for a conforming loan and $431,250 for an FHA loan.
Improving Credit Score To Save on Monthly Payments
Here is our previous article on how to improve your credit score. A higher credit score can help you to qualify for a loan but also it will lower your mortgage interest rate, get you more loan options, and save you money on UMIP (upfront mortgage insurance premium) when choosing a conventional loan instead of FHA.
Let’s say you want to buy a house in Maryland, and your FICO score is 620. The house price is $330,000 and you put down 10%. Based on myFico loan saving calculator, you would save $95,425 on a 30-year fixed loan for the entire term of the loan if your credit would be at 700. With 80 points differences in credit score, the mortgage interest rate can be higher by about 1,5% which is around $250 extra per month for a $300,000 mortgage loan (total interest paid instead of $275,00 will be at $371,239).
Keep in mind that in some cases paying off your credit card (lowering credit card utilization) can bump up your score by 20-30 points in 1-2 short months.
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Chris & Karen Highland
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