#what is credit score
Credit Score Needed to Buy a House in 2014
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Summary: Mortgage lenders use credit scores to measure the amount of risk a borrower brings to the deal. In order to be approved for a home loan, your score needs to meet the lender s minimum requirement. This article addresses the question: What credit score is needed to buy a house in 2014?
Let s start with some general rules regarding credit scores and mortgage loans. Most lenders prefer to see a score of 620 or higher. when considering applicants for a home loan. This is not a hard and fast rule. It s just a commonly used minimum standard within the mortgage industry.
Why do they often draw the line here? In a word, statistics. Statistical analysis shows us that people with lower credit scores have a higher risk of mortgage default. A default occurs when the borrower stops making the monthly payments, for whatever reason. The lower the score, the higher the risk. This is how lenders and creditors see it.
What is a Credit Score?
There are several different credit-scoring models in use today. In this article, we will focus our attention on the FICO credit score in particular. It s the one most commonly used by mortgage lenders. The FICO range goes from 300 to 850. Again, higher is better. A credit score of 620 or higher is typically what s needed to buy a house with a mortgage loan. But there are exceptions to that rule. The 620 credit score will come up again later, by the way, when we discuss the new rules for FHA loans .
Your score is based on the information compiled within your credit reports. You have three of these reports, because there are three reporting companies in the United States. They are TransUnion, Equifax and Experian. Each of these companies collects data from lenders and creditors as to how their customers repay their debts.
For instance, when you make payments toward a credit card or personal loan, that payment history gets reported to the three credit-reporting companies. If you make all of your payments on time, you will likely end up with a good score. If you miss payments, and the creditor(s) report those delinquencies to the reporting companies, you ll end up with a lower score.
You can learn more about the various scoring factors by visiting MyFICO.com.
Why Do Mortgage Lenders Care About Them?
If you can afford to pay cash for a house, your credit score doesn t really matter at all. It only comes into the picture when you apply for a mortgage loan.
You need a good credit score to buy a house with a home loan. This three-digit number can make the difference between mortgage approval or rejection, all on its own. But why? Why do lenders care so much about it? It has to do with risk. Your credit score is much more than just a number. It s a risk-assessment tool. For better or worse, it tells lenders how much risk you bring to the table, as a potential borrower.
It s not the only thing they consider when you apply for a loan (they ll also consider your debt level, income stability, and other factors). But a good credit score is almost always needed to buy a house with a mortgage loan. It s one of the first things the lender will look at.
What Score is Needed to Buy a House?
So, what credit score do you need to buy a house? This is a tough question to answer because there are many variables at work here. Different loan programs have different requirements. For example, lenders typically allow lower scores for borrowers using FHA loans, as opposed to a conventional mortgage. So there isn t a single number, or cutoff point, that applies in all cases.
There are, however, certain rules of thumb within the lending industry and even a few federal rules that set the bar at a certain level in most cases. In 2014, most lenders will require a credit score of 620 or higher for conventional mortgages. So if you re planning to buy a house with a conventional (non-government-insured) loan, you will probably need a score of 620 or above. Again, this is not set in stone.
In January 2012, the Home Buying Institute conducted a small survey of mortgage lenders across the U.S. They wanted to know what the baseline requirements were for mortgage loans. One question had to do with credit scores in particular. Lenders were asked what score, at a minimum. borrowers would need to buy a house with an FHA loan versus a conventional mortgage. According to their survey, Most lenders required a 600 or above for FHA, and a 640 or above for conventional.
Some of the survey respondents said they would entertain slightly lower scores on conventional loans, if the borrower had compensating factors such as a large down payment, plenty of cash reserves, or a long history of making mortgage payments on time.
Update: New Rule for FHA Borrowers
Borrowers with credit scores too low for a conventional mortgage often turn to the FHA program as a last resort. This program is managed by the Federal Housing Administration (FHA), which falls under the U.S. Department of Housing and Urban Development (HUD).
Generally speaking, it s easier to qualify for an FHA loan than a conventional one, where credit scores are concerned. Borrowers can also make smaller down payments, as low as 3.5%. This is a direct result of the government s insurance. Through this program, the federal government insures the lender against losses. So if the borrower defaults, or stops making payments, the lender will be covered for financial losses. As a result, they are more flexible with their qualification guidelines and criteria.
But a new rule announced in January 2013 could raise the bar here as well. Going forward, FHA borrowers with credit scores below 620 and debt-to-income (DTI) ratios above 43% will face tougher screening from an underwriter. You can learn more about it here .