Buying a House and Credit Scores: What to Know

April 21st, 2021 by
home buying

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When purchasing a home there are basically four types of loans that are used. Each loan has a minimum FICO Score attached to them that will assist in determining your interest rate on your home loan.

A better credit score could potentially save you hundreds, if not thousands, of dollars on interest payments, according to MyFICO.

Conventional Loan

For a Conventional Loan, the minimum FICO Score is 620. This mortgage loan is a loan that is eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. This type of loan has two categories, conforming and non-conforming.

A loan in which the amount falls within the maximum limits of Fannie Mae and Freddie Mac which is backed by most mortgages is known as a conforming loan.  Loans that do not fall within these guidelines are considered “Jumbo” Loans or non-conforming loans.

Non-Conforming Loan

For a non-conventional load or jumbo loan, the FICO Score required is none, although most lenders require a 680.

This loan exceeds the limits set by Fannie Mae or Freddie Mac, which means they are not eligible to be purchased, guaranteed, or securitized.

Federal Housing Administration (FHA Loan)

A Federal Housing Administration (FHA) Loan is for those with limited down payments and who have a higher risk in their credit history. A FICO Score of 500 is required with 10% down or 580 with 3.5% down.

This loan also requires two mortgage insurance premiums, one is paid upfront, and the other is paid annually for the lice of the loan if you put down less than 10%.

Veterans Affairs (VA Loan)

The VA Loan has a zero minimum FICO Score requirement; however, most lenders will require a score of 620. This loan is a 0 down mortgage that is partly-backed by the Department of Veterans Affairs and partially by private lenders.

Borrows who are eligible can use this type of loan to buy as their primary residence or refinance an existing loan.

Can your FICO Score influence your mortgage interest rates?

When deciding to purchase a home, one of the first things to do is to check your FICO Score to see if you are on the border of getting a better interest rate by having a higher score.

A LendingTree study showed that borrowers with a FICO score between 580 and 699, which is considered a “fair” score, pay more in interest than those with a score range between 740 and 799 or the “very good” range.

The difference can be up to $41,000 over the lifetime of a loan valued at $253,400. It may be in your best interest to bump your FICO score up a little in order to save money in the long run.

 

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Posted in Financial Planning