Minimum Credit Score Requirements to Buy a Home
One of the first factors lenders look at when you apply for any loan in Louisiana, whether conventional or government-backed, is your credit score.
It may look like just a three-digit number, but it tells lenders at first glance if you are financially responsible. Each loan program has a minimum credit score to buy a home. These are requirements that you must meet, but you should also pay close attention to your credit history.
The credit score is the first thing they see. It’s what lenders use to decide if they will move forward with your application. For example, if you have a 500 credit score and applied for a conventional loan, they wouldn’t move forward. But, if you had a 599 score and applied for an FHA loan, they’d process your application.
Once you move past the credit score barrier, lenders dig further into your credit history. They want to see how well you pay your bills, if you overextend your credit, and if you have any public records, such as collections, bankruptcies, or foreclosures. They’ll look at each tradeline, and may ask further questions about your history to determine your financial responsibility.
Knowing your credit score will help you determine which loan program works for you:
- FHA loans – Borrowers need a 580 credit score to make a 3.5 percent down payment. If you have a credit score between 500 – 579, you may qualify but with a 10 percent down payment.
- USDA loans – Borrowers need at least a 640 credit score. If you have a lower credit score, you may still qualify, but underwriters may ask for more documentation and/or take more time underwriting your loan.
- VA loans – The VA doesn’t have a minimum credit score requirement, but most lenders want at least a 620 score on average. Some lenders in Louisiana accept lower credit scores if you have other qualifying factors.
- Conventional loans – These loans have the highest credit score requirements. Most borrowers need at least a 660 to qualify. It depends on the lender and your other qualifying factors, though. For example, if you have a large down payment, you may get approved with a lower credit score because the down payment offsets the risk.
Keep in mind, even if you have the credit score, you need to prove you have what it takes to qualify. If you have recent public records (collections, bankruptcy, etc.) on your credit report, it raises red flags. Lenders may ask more questions and/or ask for more proof of your ability to afford the loan or proof that you’ve straightened out your financial life.
🔹Ways to Check your Credit Score and Credit History
If you don’t know your credit score or aren’t sure what your credit history looks like, there are several free ways to get the information:
- Get your credit score – Check with your credit card companies or bank. Most companies offer free access to your credit report with any financial product. You must opt-in to the program, so make sure you sign up. Most companies give access to your Experian score. You may also sign up through Experian directly, as it’s also free. This credit score won’t be exactly the same score lenders see, but it’s a close estimate of it.
- Get your credit history – Like we said above, your credit history plays an important role too. Even if you have a good credit score now, but had some recent negative history, lenders may want an explanation to make sure the issue is taken care of and won’t be repeated. You can get free access to your credit history (weekly until April 2021) here. Look over your credit history carefully, looking for late payments, overextended credit, collections, and even errors. Make note of any issues and use the tips below to help improve your credit score.
🔹How to Improve your Credit Score
Before you apply for a mortgage, learn how to improve your credit score. Because it’s the first impression lenders have of you, it should be as good as possible. You can’t change your credit overnight, so start this process as early as possible – 6 to 12 months is ideal. But at the very least, give your credit 30 – 60 days to improve once you make changes.
Fortunately, credit scores change all the time. As soon as lenders have something to report on your account, they do. If it’s good, your credit score may increase and if it’s bad, it may decrease, it’s that simple.
If you want your score to increase, try some or all of the following:
- Bring all late payments current – Your payment history is the largest part of your credit score. It makes up 35 percent of your score. One late payment (more than 30 days late) can drop your credit score. If you have more than one late payment or a 30-day late payment turns into a 60 or 90-day late payment, your payment drops more. Do what you can to get current on all payments for the best and most drastic results.
- Decrease your debt – Your utilization rate (comparison of your outstanding debt to your total credit line) is the next largest portion of your credit score. It makes up 30 percent of your credit score. Ideally, you should have no more than 30 percent of your total credit line outstanding at one time.
- Don’t close unused credit cards – It seems logical to cancel credit cards you don’t use, but don’t do it. Closing old accounts lowers your average credit age. The less credit history you have, the lower your credit score drops. Open credit cards also help lower your utilization rate or the amount of credit outstanding versus your total credit line which also helps your credit score.
- Check out Experian Boost if you need help improving your credit score. Experian Boost gives you credit for paying your utility bills and cell phone payments on time. You have to sign up for the service, but it’s free and reports your utility payments for six months to help boost your credit.
- Only apply for credit when you need it. Avoid applying for multiple credit cards or other loans at one time. Inquiries hit your credit score for a few points every time you apply, even if you don’t get approved. Hard inquiries also stay on your credit report for 2 years.
- Correct/dispute any errors. If your credit report has errors, contact the appropriate credit reporting agency. For example, if TransUnion reported a late payment on your car payment when you have proof that you made it on time, you’d file the dispute online with TransUnion. They have 30 days to respond to the dispute.
Improving your credit score takes time. Give it at least a few months, but it may even take longer. The earlier you check your credit the better your chances of having a high enough credit score for loan approval become.
Our team here at Bayou Mortgage can check you credit and give you tips and advice on improving it. If you think you have the minimum credit score needed to buy a home just click the see what you qualify for link below to get started.