When buying a home, one of the most important things that borrowers need to consider when applying for a conventional mortgage is their credit score.
We use credit scores to determine a borrowers’ affordability and debt repayment behavior. When you apply for a mortgage, your loan officer needs to know what type of borrower you’ll be. They need to know that you’ll be able to make the monthly repayments without defaulting on the loan, and the best way to determine this is to look into your debt repayment history. A credit score shows how you have managed previous debt such as personal loans, car finance, credit cards, and other mortgages.
What are the requirements for conventional loans?
In most cases, lenders will require a credit score of at least 620 to qualify for conventional mortgages. It’s much trickier to get approved if your score is lower than this, and it may lock you out of qualifying with specific lenders.
If your credit score is 740 or higher, you’ll usually be able to make a lower down payment because the lender deems you as a less risky borrower. You could put down as little as 3-5% and still qualify.
The other good thing about having a high credit score is that you get the most favorable conventional loan rates and can save a significant amount on interest throughout your loan.
The difference between FHA loans and conventional loans
A Federal Housing Administration (FHA) loan is a home loan insured by the government and issued by an FHA-approved lender.
FHA loans are popular due to their more lenient eligibility requirements. FHA loans require a lower minimum down payment than most conventional loans. This makes them much more accessible for those who would otherwise struggle to get a conventional loan.
The main difference between FHA loans and conventional loans is that FHA loans only require a FICO score of 580. This lets borrowers qualify for the low down payment advantage, which is currently 3.5%. If your credit score is below 580, the minimum down payment requirement is 10%.
The difference between VA loans and conventional loans
A VA loan is a mortgage backed by the U.S. Department of Veterans Affairs. It works similarly to FHA loans but is only available to active military members, veterans, and their surviving spouses.
It’s important to know that, like FHA loans, the VA does not issue the loans. The VA-approved lenders give the loans, so each lender has its criteria for mortgage approval.
The difference between VA and conventional loans is that the VA does not currently set a minimum credit score. However, most lenders want to see a score of 620 or above.
Credit scores are just part of the application process, however. In some circumstances, lenders will have a range of criteria for borrowers to meet and may consider those with lower credit scores.
The best thing to do is speak with different lenders or OVM Financial to help you find the best home loan option for you.