We all have dreams, and some of us dream of the perfect home. While some of us prefer to rent, others prefer to build or better still buy a home. Most people require a third-party financing to be able to purchase a home. A mortgage provides a borrower the funds to purchase a home. There are so many requirements that you have to meet before your loan request can be approved by either lenders or financial institutions. One of the things that they look at is your credit score.
There are two types of mortgages that you should know about, conventional and FHA loans. What is the difference between the two and what credit score is required to get approved for mortgage?
A credit score is a statistical analysis conducted by both lenders and financial institutions to assess the likelihood of a borrower repaying a particular loan offered to him or her. A credit score reveals a borrower’s creditworthiness. Credit score in this country is always based on the credit reports provided by three major credit bureaus. They range the score in order from the highest to the lowest number.
These three major bureaus are:
FHA Credit Score Requirements
FHA loan is a loan that is insured by the federal government and is also famously known as a bad credit home loan. You typically need a credit score of at least 580, but sometimes they can accept a score lower than 580. The beauty of an FHA loan is that it requires a minimum down payment of only 3.5% of the cost of the home. There are times when you can get a fully financed mortgage through FHA to buy a come without a down payment. The closing cost of this particular loan type is lower and easier qualifying. The downside is it takes longer to process compared to the conventional loan.
Conventional Loan Credit Score Requirements
A conventional loan is a loan that is not insured by the federal government. It is available to any one that meets the lending guidelines. The requirements are mainly pegged on your credit score, and they are very stringent making this type of loan difficult to qualify for. You need to have a credit score of at least 700 or more. The higher your score the sweeter the interest rate, but if the score drops, the interest rate increases and various additional fees may be included making your mortgage very expensive. The good thing about a conventional loan is that the process can be very quick compared to an FHA loan.
How financial institutions and mortgage lenders approach your credit score is by using a mortgage scoring model. For example, there are scores for credit cards, auto, loans, and mortgages. Each loan produces a different score. The value placed on each score varies depending on what the borrower is looking for. They take all three scores and put them in a numerical order. They remove the highest number and the lowest number, and what is left, the middle number becomes your mortgage score.
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Low down payment, low credit score requirements, low closing costs, and amazing interest rates make an FHA home loan very attractive. The only other thing you require is a lot of patience as this loan type usually takes a longer time to process compared to the conventional home loan.
If you have an excellent credit score, can afford the 20% down payment of the cost of the home, and would not like to be kept waiting, conventional loan is what you are looking for to help you live in your dream home.
Think about what will work best for you and most importantly endeavor to improve your credit score to increase your chances of getting good interest rates on your home loans. Contact a lender today, click the link below and within minutes you’ll be matched with a qualified lender waiting to help you with your new home loan. Rates change almost daily so don’t wait. Speak with a lender today to discuss your options. It’s a quick and easy process and only takes a few minutes to get started.