Why do we care about our credit score? It’s not like we have to wear it around like Hester Prynne when she had to display her “A” in The Scarlet Letter. And unless we go around bragging about how good our score is or complaining about how bad it is, our friends, family, and those in our inner circle don’t really know, and most likely don’t care.
Well, people care because some of the major milestones we want to achieve in life — buy a car, buy a home, even get our dream job — can be contingent upon this magic little number (hopefully, big number). In those cases, it matters big time.
When it comes to a credit score, many consumers want to know the answer to the million-dollar question: “How high does it have to be?”
The answer to that can be tricky, though, because lenders and employers consider other factors aside from just your credit score when they make decisions. Although there’s no exact or specific credit score requirement, if you want to buy a house now or in the near future, you should have a credit score that’s at least in the 620 range.
But a 720 score or higher is ideal. Does that 720 score guarantee that your loan will be approved? Absolutely not. You have to have all of your other ducks in a row, as well. Your income, debt-to-income ratio, employment history, rental or mortgage history, and even the specific items on your credit file can play a role in a lender’s decision.
VA, FHA, or conventional loan?
When applying for a home loan, the type of loan you apply for can make a difference in the credit requirements. Conventional loans are those issued by a lending institution to a borrower. Generally speaking, borrowers should have a “bare minimum” credit score of 620, but ideally you should have a score closer to the 740 range, according to a Bankrate publication.
FHA loans are different from conventional loans in that they are backed by the Federal Housing Administration. They can be a bit easier to qualify for than conventional loans, and first-time home buyers often go the FHA loan route.
In 2010, the U.S. Department of Housing and Urban Development (HUD) issued the following statement in a press release regarding the FHA credit score requirements: “New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.”
A 580 score is relatively low, though; again, this score may not guarantee your qualification.
Like FHA loans, VA loans are also backed. But they are backed by Veterans Affairs, as opposed to the FHA. Only qualified military members, veterans, and surviving spouses generally qualify for VA loans. According to Military.com: “VA Loan Providers typically shy away from anyone with a FICO Score lower than 620. Even though a score of 620 is the lowest threshold most lenders will consider 680 is what you should shoot for.”
Other factors to consider
Yes, credit matters, but at the end of the day, a lender wants to be able to feel confident that you will be ready, willing, and able to repay your loan.
According to the VA Handbook, these compensating factors may impact a loan decision:
- Excellent credit history
- Conservative use of consumer credit
- Minimal consumer debt
- Long-term employment
- Significant liquid assets
- Sizable downpayment
- The existence of equity in refinancing loans
- Little or no increase in shelter expense
- Military benefits
- Satisfactory home ownership experience
- High residual income
- Low debt-to-income ratio
- Tax credits for child care
- Tax benefits of home ownership
They cannot cancel out bad credit, nor can they guarantee a loan, but they can work in your favor.