According to a recent survey by Bankrate.com, nearly half of renters say they currently don’t own a home because they can’t afford a down payment or their credit score doesn’t meet mortgage qualification standards. Are these mortgage misconceptions keeping you from buying a home?
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Mortgage Misconception #1: My Credit Score Is Too Low
Indeed credit scores are a big factor of mortgage qualification but many Americans have a misconstrued idea of the credit score necessary for financing approval. A 2015 Wells Fargo survey found that two-thirds of Americans believe they need a very good credit score to buy a home, with nearly half of that group thinking a “good” credit score is over 780.
In the mortgage world, a score over 780 is considered “excellent” or “top tier” while scores over 660 are considered “good”.
The Bottom Line on Credit Scores & Mortgage Qualifications
While a higher credit score indicates that you are a responsible borrower and will likely get you a lower interest rate (depending on your loan type), credit score requirements vary among mortgage programs. For instance, a minimum score of 620 is required by all mortgage loans delivered to Fannie Mae. Currently, Compass Mortgage has the ability to finance FHA loans with credit scores as low as 560.
Other loan programs, such as USDA Rural Development and FHA, have flexible credit guidelines which allow borrowers with no credit score to build a credit history with non-traditional credit sources, i.e. rent, utility bills, cell phone bills, etc.
Mortgage Misconception #2: I Don’t Have Enough for a Down Payment
The Bankrate.com survey also asked non-homeowners what percentage of the total cost they would need to contribute as a down payment on a potential home purchase. Nearly 2 in 10 said somewhere between 11% and 20%, while another 17% said between 6% and 10% down.
Even more notable, almost a quarter of non-homeowners said they had no idea how much they would need for a down payment to buy a home.
The Bottom Line on Down Payment Requirements
A 20% down payment used to be the status quo requirement to buy a home, but currently there are several loan options that help eligible borrowers access home financing with little to no money down, including:
- USDA Rural Development – 100% financing
- VA – 100% financing
- FHA – 3.5% down payment, which can be gifted from a family member or a grant from a state or local government down payment assistance program
- 1stHomeIllinois – offers $7,500 in down payment and/or closing cost assistance for first-time homebuyers in select Illinois counties
- @HomeIllinois – allows first-time and repeat homebuyers to buy a home with as little as $1,000 out of pocket
- HomeReady – Up to 97% financing with flexible sources of funds and no borrower minimum contribution required on 1-unit properties
Awareness of what it takes to qualify for a mortgage may be a major player in what’s keeping renters out of the homebuying market. For more information about what it takes to get a mortgage, download our free Mortgage 101 Handbook.