Regardless of whether you’re buying for the first time or refinancing an existing mortgage, the minimum credit score required for a home loan will depend on the type of mortgage you’re applying for and your lender.
How do I get a home with bad credit?
If you can’t qualify for a conventional loan, you may still be able to get a mortgage through government-backed mortgage programs — like the ones insured by the VA, FHA and USDA.
These programs receive explicit backing from the federal government, which reduces their risk to the lenders that provide them. As a result, prospective borrowers can qualify for home loans with credit scores as low as 500, in the case of an FHA loan.
If you’re a military veteran or service member who qualifies for a VA loan, you may not be required to meet any credit score standard, but will instead be evaluated based on your entire financial profile.
Keep in mind, though, that even if you’re approved for a home loan with bad credit, you’ll likely be penalized with a higher interest rate or more restrictive loan terms. It may be more cost effective to defer taking out a home loan until you’ve had a chance to improve your credit score.
How can I raise my credit score?
You can improve your credit score by reducing your outstanding debts, paying off credit cards and staying up-to-date on monthly payments. It’s also helpful to avoid making any new credit applications or taking out any new debt while you give your credit score a chance to bounce back.
Credit repair is a long-term commitment and can take months (or even years), depending on your financial profile. However, the benefits of a high credit score are immense.
For example, let’s say you need a $400,000 home loan. If your credit score is between 640 and 659, bumping it up into the 660 to 679 range could save you $41,584. Getting it into the 680 to 699 range could save you $62,006. And if you can manage to get your score into the 700 to 759 range, you could save $78,755.