A Minimum Credit Score is Necessary for Both Conventional and FHA Loans
Buying a home isn’t easy, but sometimes financing a home is even harder. The majority of people rely on home loans from lenders in order to purchase their homes, but that does come with some requirements. Your credit score can play a big role in whether or not you qualify for a home loan or specific mortgage.
In this article, we will explore what kind of a role a minimum credit score can play. Remember, when it comes down to it, the best way to find the best loan for your needs is to work with a professional if possible.
Definitions and Differences Between FHA and Conventional Loans
The majority of new home buyers find themselves confused by the different kinds of loans, which is another reason working with a professional is important. In general, there are two prominent loan types: FHA loans and conventional loans. However, there are plenty of other loan types that also might be a good fit depending on your circumstances.
An FHA loan is a loan that is backed by the government, which is why they offer so many great perks. FHA stands for Federal Housing Administration, and these loans can offer some great opportunities. The most desirable part of an FHA loan is the fact that is generally less restrictive. This means that more people qualify, particularly those looking to save money upfront (you may be able to put as little as 3.5% down).
Conventional loans, on the other hand, lack the guarantee that comes with FHA loans. These loans are a higher risk for lenders, which makes them come with more qualifications. Applicants will need a higher credit score and will need to meet certain other financial standards in order to qualify for this type of loan.
Which One is Better? FHA or Conventional Loan?
Defining a loan as better or worse is difficult because it all depends on your circumstances. A person who wants to save money and who doesn’t have a very high credit score will find that an FHA loan is likely the best fit simply because they are easier to obtain. Anyone who wants to receive a loan but doesn’t want to end up being outright rejected due to their financial history will generally find FHA loans to be a good fit.
A conventional loan is a better fit for someone who is well in control of their finances and has had the opportunity to develop them further. These loans can offer fixed rates and a nice long loan term. However, they are also more strict when it comes to certain qualifications. As long as you meet the requirements, you might find that a conventional loan can offer you more in terms of a long-term benefit.
Credit Score Requirements for FHA Loans
FHA loans are very forgiving as far as credit scores go, and this is what they are known for. Many people make the mistake of assuming in advance that they won’t qualify, but that isn’t necessarily true. An individual can have a credit score as low as 500 and still be approved for an FHA loan, but it isn’t all that simple.
Though you might qualify for the loan, it can come with a few hidden considerations. While someone with a higher credit score can skip the down payment with an FHA loan, someone with a 500 credit score will ultimately end up needing to provide a fairly hefty down payment. Still, this might not be the worst thing if you are prepared for it.
Even though you can technically qualify for an FHA loan with a 500 credit score, remember that the lender does matter here. Each lender will set their own standards for what they require in order to qualify for one of these loans. Some lenders will not offer this loan for those with truly low credit scores, even if they technically could. You will need to ask around to be sure.
To Buy a Property, You Must Have a Good Credit Score
Your credit score is very important when it comes to buying a home. Even though you might be on track financially at the moment, your credit history will be important—and it can work against you. Depending on the property that you want to buy, you will need to consider how your credit score will influence this.
In the event that you plan on buying a large property, or one that has a higher value, your credit score can limit you. Most lenders do not want to offer loans at a high price point if your credit score is low, but that doesn’t mean it is impossible. You can have a bad credit score and still purchase a home. Unfortunately, to benefit from great loan terms, you will need to have a good credit score.
Both FHA loans and conventional loans have plenty to offer. Each of these loan types will have specific limits on what you can buy, and they will come with different terms. You might have to cover additional fees, like mortgage insurance, depending on what kind of loan you decide on.
Before you sign on a loan, make sure that you work with a lender or real estate agent to determine what the best fit truly is. The more you know, the more likely you are to benefit from a loan that suits your needs! No matter what, it helps to have a good credit score!