Mortgages - What You Need To Know

When discussing a home loan with a mortgage lender, many buyers, especially those purchasing a home for the first time, want to know what minimum credit score they need to secure a mortgage. There are a lot of factors that determine what your minimum credit score must be in order to qualify for a home loan. Your down payment, the type of loan for which you are applying, and the type of house you want all can have an effect on the minimum credit score your lender will require.

How Much House Can I Buy?

In certain North Carolina areas, home prices can be significantly lower than the national average. In Charlotte, for instance, the average home value is just over $185,000. That’s nearly $4,000 less than the national average. However, in a city such as Raleigh, the median value for a home is over $220,000. In Asheville, the median home value is nearly $254,000.

The minimum credit score required varies greatly depending on your down payment. If you put down more, you may be able to qualify with a lower credit score. An added bonus is that your mortgage payment decreases too. If you have a fixed amount of money to use as a down payment, you may want to consider a more affordable area, so you can buy more house for your budget.

Minimum Credit Score for a Conventional Home Loan in North Carolina

While the minimum credit score for a conventional home loan varies from lender to lender, the lowest is usually somewhere in the ballpark of 620. Equifax, TransUnion, and Experian are the three major credit reporting agencies. All of them rate your credit score slightly differently, but at least two out of the three should be above that number.

If you don’t have a credit score above 740, your mortgage lender may require you to purchase private mortgage insurance (PMI). PMI is usually required with a score that is under 740 points. The cost of that insurance grows significantly the lower your credit score gets. While a credit score in the mid-600s can still get you favorable terms, the gap continues to widen as your credit score drops.

The percentage of PMI is also affected by the amount of your down payment. That’s why it’s a good idea to have at least 20 percent to put towards your mortgage. This lowers your mortgage rate and could potentially eliminate the need for PMI. A 20 percent down payment could also decrease the threshold for a minimum credit score. Even if you don’t have a significant down payment, however, you can still be eligible for a conventional mortgage, even with a lower credit score.

Minimum Credit Score for an FHA Loan in North Carolina

Minimum Credit ScoreIf your credit score is hovering around or lower than 620 to 640, you may want to consider a loan backed by the Federal Housing Administration. An FHA loan can also be a good idea if you don’t have a significant down payment. The benefits of an FHA loan include a low down payment, easier credit qualifications, and lower closing costs. However, there are some limitations and downsides to an FHA loan. You’ll pay an insurance premium with an FHA loan, typically larger than the private mortgage insurance required for a conventional loan. Also, while it is not just limited to first-time home buyers, as many people think, there are some restrictions as to who qualifies for an FHA loan.

That being said, your down payment can be as low as 3.5 percent if your credit score is above 580. Even if it’s below, you still may be able to receive an FHA loan, although the down payment rises to 10 percent if your credit drops below this threshold.

FHA loans are available for many types of homes, from mobile homes to an energy-efficient mortgage that allows you to finance the cost of energy improvements. While an FHA home loan will likely be more expensive than a traditional home loan, the low minimum credit score requirements might make it the right choice for you.

The right North Carolina mortgage lender can help you navigate your loan options regardless of your credit score. Contact us today to speak with an experienced loan officer.