The government-sponsored enterprises, The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac) require a certain minimum FICO Score. However, your lender ultimately decides on whether to extend you a mortgage. Generally, lenders and co-op boards look for higher scores.
Unless you are a cash buyer, obtaining a mortgage is a key part of the home buying process. Therefore, we think it behooves the majority of buyers to understand this arcane topic.
Fannie Mae and Freddie Mac both require a minimum 620 FICO Score. You can have as low as a 580 FICO Score for an FHA Loan, which is insured by the Federal Housing Administration, providing you have a minimum 3.5% down payment, or a 500 FICO score if you can put down 10% of the purchase price.
If you are eligible for a VA loan, there is no minimum required score.
What the score means
There are three national credit bureaus, Equifax, Experian, and TransUnion. Each could very well have a different FICO score for you, however. The Fair Isaac Corporation had provided several explanations for the variation, including different time periods when the score request was made, varying information reported to the bureaus, and lenders reporting information to the bureaus at various times.
The scores range from 300 to 850. A bad credit score is 300 to 629 while fair or average credit is indicated by a score of 630 to 689. Lenders consider your credit good range if the score is in the 690 to 719 range. If your score is at least 720, you have excellent credit.
Since there are three scores, lenders typically use the middle score. Hopefully, there is not too much variation, though.
Five categories comprise your FICO score. These are weighted differently, however. Your payment history is the most heavily weighted, at 35%. Next, the amount you owe accounts represents 30%, with a particular emphasis on the availability under your revolving credit (e.g., credit cards). Lenders want to see how much debt you are carrying versus the amount that you can borrow, with the lower, the better. Your length of credit history counts for 15%. Rounding it out, the type of credit and new credit (e.g., new credit inquiries and recently opened accounts), each represents 10% of our score.
One person has bad credit
If you are buying a house with someone that has poor credit, and this is indicated by his/her credit score, there are other options you can pursue. You can apply for a mortgage by yourself, providing you can get approved. Remember, there are other items that lenders look at, such as income, notably your debt to income ratio, and employment history.
There are legal ramifications that you should also consider. You are the one financially responsible for the mortgage. However, this does not affect the property’s ownership, and you can still hold the title in two names, regardless. If you go down this route, this means he/she has a financial interest but does not have a corresponding financial obligation.