Credit scores and how they impact real estate transactions.
Let’s just say, it’s probably lower than you think. According to Ellie Mae’s Origination Report from September 2016, a significant portion of homebuyers had scores below 750. Fact is, you don’t have to have perfect credit to qualify these days.
Many potential homebuyers believe that they need a score over 780 to qualify, and yet about 80% of buyers with FHA loans had a score below 750! The FHA (Federal Housing Administration) provides mortgage insurance on loans so that your lender can get you a better deal. That means low down payments, low closing costs, and you guessed it – easier credit qualifying. Your down payment can be as low as 3.5% of the purchase price and as a borrower you can have a credit score as low as 580.
The report also reveals that just over 36% of approved, closed Conventional loans had a FICO score below 750. While the majority of buyers fall within the 750-799 range, there are still a significant chunk of buyers with lower scores who qualify.
CREDIT SCORES AND INTEREST RATES
First of all, what credit score you need to qualify for a mortgage depends on whether you choose a Conventional or FHA loan. If you haven’t decided yet, check out our complete price breakdown of FHA vs. Conventional financing. In order to qualify for a Conventional loan, you need a higher credit score, whereas buyers can qualify for an FHA loan with as low as a score of 580.
Second of all, your credit score determines the type of interest rate you will qualify for. The higher your score, the better (lower) your rate will be. Check out the breakdown of what your score will fetch you on the mortgage market in terms of an interest rate and loan.
780 and above– Qualify for the best rate available
700-779 – Qualify for a relatively good rate. It will not be as low as someone with the highest score possible but it will be good.
660-700 – Qualify for an average rate. It won’t be the best rate on the market but you will be able to qualify.
650 and below – May qualify for a higher rate depending on the size of your down payment. Those with a higher down payment are more likely to qualify.
620 and above – Qualify for a mortgage loan with 3.5% down. FHA lending standards not as strict as Conventional loans however lenders are tightening their restrictions.
580-620 – May qualify with a 10% down payment.
Nontraditional Credit – May qualify with 3 valid credit references. If you have limited credit or none at all, FHA will accept 3 positive credit references i.e. consistent utility payments, cell phone bill, gym membership, etc.