Credit scores can be a confusing and misunderstood topic. In broad, a good credit score is ideal to qualify for a mortgage. However, different types of loans require different credit scores. Let us discuss what exactly a credit score is and what credit score you need for different types of loans.
What is a credit score?
Your credit score is a number ranging from 300 to 850 (the higher, the better). This number indicates how “creditworthy” you are, and in the eyes of potential lenders, how reliable you are to repay your loan punctually. Factors like your payment history, amount owed, new credit, length of credit history, and types of credit determine your numeric score.
How do I know my credit score?
Once you understand what your credit score is, it is important to know your current personal credit score. There are three national credit reporting agencies, Equifax®, ExperianTM, and TransUnion® , that formulate your score by sorting through information from lenders, banks, and other companies. You are authorized to a free, yearly credit report from all three of these agencies. Checking your score is simple and essential to stay on top of your credit score; this can help ensure you put yourself in a good credit position and know what loans are available to you.
Different loan types mean different credit scores.
When seeking a mortgage, it’s important to know there are many varying loan programs available to you. Conventional loans and government loans have different requirements in terms of credit score. Here are the potential loan types available to you.
- Conventional Loan
The first type of loan is a conventional loan: a home loan following standards set by Freddie Mae and Fannie Mac. These loans are not associated with a government agency; therefore, they can offer more competitive interest rates and repayment periods. For this type of loan, it is ideal to have a high credit score (740 or higher). A 620 or higher credit score is recommended for application. It is technically possible to obtain a conventional loan with a lower score, however, a higher interest rate may be offered.
- FHA Loan
The next type of loan is an FHA loan. These loans are insured by the Federal Housing Administration; these loans are easier to qualify for than conventional loans. With a minimum credit score requirement of about 580, this option is best for those who have a lower credit score or not much saved for a hefty down payment.
- VA Loan
This type of loan is only available to those who are a veteran or qualified service member/spouse. If you meet these requirements, this loan has advantages such as no required down payment and no set minimum credit score.
- USDA Loan
The final loan type, USDA loans, are applicable to those who live in a rural or suburban area with an income below 115% of the areas median. This loan is backed by the government and requires a credit score of around 640.
Basically, know your options and raise your score!
There are many available loan options and many ways to raise your credit score. It is crucial to stay aware of your credit score so that you can identify any errors and work to improve it. From there, you can determine what loan options are best for you. For help determining which loan options are best for your financial situation, contact us!