Your credit plays an infinite role in your ability to get a mortgage loan. How good your credit stacks up and what your credit history reveals may direct you into one program versus another. Here’s how your credit score drives what program you are eligible for.
It’s no secret getting a mortgage is a bureaucratic and very compliant government control process that requires adherence to dates, time frames and eligibility. Contrary to popular belief, there’s only two types of mortgages available in today’s mortgage environment; government-backed loans and government-insured loans. Government-backed loans including Fannie Mae and Freddie Mac (conventional mortgages) and government-insured loans include FHA Loans, VA loans and USDA loans. Jumbo mortgages are also another mortgage type defined as any dollar amount over the maximum high balance loan limit in the area in which the property is located. For our purposes we’re going to be talking about government-backed and government-insured loans.
If your credit score is 700 or more and you have a 3 or a 5 percent down minimum payment a conventional loan might be the most suitable choice for you so long as you’re sticking with a conforming loan which is $453,100. If your desired loan size exceeds this amount, you’ll start to need at least a minimum down payment of 5 percent with your 700 or higher credit score.
If your credit score is less than 700 you may need to start thinking about the possibility of getting a loan that is insured by the Federal Housing Administration which is more broadly known as FHA. FHA Loans contain a rather pricey form of PMI, however, the interest rates on FHA Loans are lower so it’s actually probable that you might be able to get an FHA loan with a lower payment less than a conventional loan even if your credit score is less than 700 as government-insured loans have better interest rates.
If your credit score is less than 680 you’ll need at least 20 percent down if you’re going to go with a conventional loan in most cases, but not all. The reason being is because conventional mortgages start to ding you on your credit score when you have a less than 680 credit score. FHA Loans do not have such a requirement at all.
If you have a very little down payment such as 3 or 5 percent down and your credit score is 640 or lower all the way down to 580 you almost automatically always need an FHA Loan. FHA Loans are far more lenient in terms of credit than conventional mortgages. The minimum credit score to get a conventional mortgage is 620, however, that’s also going to mean paying a much higher interest rate and fees in the form of discount points.
Generally speaking, if you have 20 percent down or more and you have a 620 minimum credit score or more a conventional mortgage is most often the most practical choice. If you have less than 20 percent down such as 10 percent down, you’ll still want at least at 680 credit score or higher-anything less than a 680-credit score with less than 10 percent down also will almost always automatically point to an FHA Loan.
Other loans that we have not discussed much in are USDA loans and VA loans. USDA loans require no money down whatsoever, but also have income limitations and you can get such a loan with a 620-credit score with no money down.
VA loans do not require a down payment and will go as low as 580 on the credit score to be eligible.
Mortgage tip: if your credit score is less than 580, some lenders on a case-by-case will do your loan.
If you’re looking to buy a house, work with a lender who can intricately navigate you through what program, payment and rate makes the most sense for you and your family financially going forward.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.