We have discussed this a bit before, but to answer this question directly, let’s go over it again. First we will discuss the examples of the minimum FICO scores that are required for various types of mortgages, getting right to the point of the question.
Some examples of minimum FICO scores required based on the type of mortgage are:
Conventional Loan – credit score of 620+
VA Loan – credit score of 620+ (there are some lenders that only require 580)
USDA Loan – credit score of 640+
FHA 203K Loan – credit score of 620+
FHA Loan – credit score of 580+ (a score of 500-579 is possible but is not very likely)
Most lenders will have a baseline credit score which they use to either approve or deny those that apply for a mortgage. Someone that has a credit score that is 700 or higher than that has a credit score that is considered to be excellent and they will likely get an offer for a loan that has a lower interest rate than someone with a lower score.
When your credit score drops lower than that and is in the 600s then you will start to be seen as a potential risk for lending to. Let’s say for example that an individual has a 680 credit score, they are still in the green and have what is called good credit, however, if their credit score were to drop to 660 or below, then that is where lenders will start turning clients down.
There are a few lenders that wait until 640 or 620 to take the better mortgage loan programs off the table. This will completely depend on your lender and what their qualifications are that they require.
The points and scores for cut off are for the fixed-rate conventional mortgages, however, there are still different options for mortgages that are available to individuals, such as FHA or VA mortgages, which are quite easy to attain and are designed for borrowers that have a credit score that is no lower than 500.
So, Are You Able To Purchase A Home If You Have Bad Credit?
When your credit score has already dropped lower than 500, this will leave you with the option of a subprime loan, also known as a bad credit home loan to those in the real estate industry.
A subprime loan has a higher percentage point for it’s interest rate than what someone with better credit would be offered. Those that have better credit are also called prime borrowers. Subprime loans also have the potential to come with additional fees and other costs.
So looking back on an example we have used before, a person that has a lower credit score would be likely to pay 0.375% more for an interest rate than someone that has a credit score that is 700 or higher who will get a 30-year mortgage that is fixed-rate.
With that in mind, if a rate for a person with excellent credit on a 30-year primary mortgage rate is at 3.875 percent, then a person who has only good credit would be required to pay 4,125% percent for the same mortgage, which is .25 percent higher than the primary rate. Someone who has bad credit would be required to pay 4.5 percent.
So looking at this example, it would mean that the monthly payment for these individuals would be around $82.99 more than what the prime borrowers would pay out monthly, not to mention that the subprime borrower would be paying out about $29,976.40 moreover that 30 year period, which is the lifespan of the loan.
This is not including the fact that if you are not able to put down at least 20% on a down payment then you will be required to pay a PMI or private mortgage insurance premium, and that can be up to 110% of the total amount of the loan every year, and it is obviously a lot more than what person with good credit would pay for a premium.
In summing up this question, yes, technically there is a minimum credit score, but it is possible to purchase a home with a lower credit score. However, there will be additional fees as well as a much higher interest rate than someone with good credit will have. It will cost you a bit to have bad credit in the long run so it is best, if you can, to work on fixing your credit.
