A mortgage loan is easily one of the most powerful and important forms of borrowing. Aspiring homeowners rely on mortgage lending to help build the financial pathway to the home of their dreams. Although mortgages are considered an indispensable element of homeownership, not all applicants are guaranteed that these funds will be made available to them.
Both private and Federal Housing Administration backed mortgages carry credit score requirements. Although you may have heard that a 730 credit score for home loans is an absolute must, this isn't quite the truth.
TL;DR (Too Long; Didn't Read)
Credit score requirements differ based upon the type of loan in question. Private mortgages may require credit scores in the upper 600s and above, while FHA loans carry significantly relaxed credit score requirements.
How Credit Scores Impact Mortgages
Although we often think of the risks that borrowers shoulder when they take on a mortgage, it is also important to realize that this burden is shared equally between lender and borrower. To understand this concept, it is first important to define what exactly the "risk" is. For borrowers and lenders, the risk of default carries a fair share of consequences. From the perspective of the borrower, a default could result in not only the loss of their home via foreclosure but also severe damage to their credit score.
From the perspective of the lender, a foreclosure is also something that is better off avoided. In the event that a bank has to repossess a property, there is a good chance that this process will result in net fiscal loss. It is the duty of the loan officers employed by the bank to ensure that all candidates seeking funding are properly vetted. A credit score is an excellent "litmus test" to measure the viability of these candidates.
Understanding Credit Requirements
Depending upon the specific type of mortgage an applicant applies for, the standards attached to credit scores will change. Individuals who are applying for private mortgages can expect for their credit score requirements to be more stringent. Although 730 credit score mortgage rates are some of the best offered today, individuals with a credit score above 620 can generally expect to receive some form of financing. The lower the credit score, the higher the interest rate attached to these funds will be.
This is due to the fact that interest rates are commonly considered to be a "hedge" against the risk of default. The more risk a borrower presents, the more interest the lender will tag on to the loan to ensure that they are being properly compensated for the risk of lending to the borrower.
FHA Loans and Credit Scores
Government-backed FHA loans are quite popular due to the fact that the credit score requirements for this form of borrowing are significantly more relaxed. To qualify for the best possible FHA down payment requirements and interest rates, borrowers must have a credit score above 580. As can be seen, this is a significant decrease in credit score requirements compared to conventional loans. In fact, individuals can still qualify for an FHA loan with a credit score below 580, although the down payment requirement attached to these funds will jump to 10 percent.
As a general rule, individuals should use a mortgage calculator with credit score and income parameters, such as the one provided by Bankrate, to determine exactly what they can expect when it comes to applying for borrowing. This information will prove to be immensely valuable both in the short and long term.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community.