How Much of a Home Loan Can I Get With a 650 Credit Score?

So, your credit score is 650. What does that mean exactly? Well, a credit score tells lenders how reliable you are at repaying borrowed money. A score of 650 puts you in the “Fair” category and falls below the national average of 710. But what does that mean for getting a mortgage?

Having a fair credit score means some lenders might consider you eligible for a mortgage, especially if it’s backed by the U.S. government. However, you might not qualify for the best interest rates available. This shouldn’t discourage you and it’s important to know where you stand so you can plan accordingly and possibly make changes if needed.

Factors Influencing Your Credit Score

Credit scores are influenced by various factors, including payment history, credit utilization, length of credit history, new credit, and credit mix.

• Payment history: This is the record of your on-time payments as well as any defaults, collections or missed payments.
• Credit utilization: It refers to the percentage of your available credit that you’re currently using.
• Length of credit history: This factor considers how long your accounts have been open and active.
• New credit: When you apply for new credits, it can slightly lower your score due to the associated hard inquiries and the potential risk of over-borrowing.
• Credit mix: Having different types of credit like installment loans (e.g., car loans) and revolving credit (e.g., credit cards) can positively impact your score.

For instance, suppose someone has had a few financial hiccups in the past. They faced some unexpected expenses that led to delinquency on their credit card bills about five years ago. However, since then, they’ve maintained a clean slate with no further delinquencies. Such a track record may be reflected in their score but doesn’t define their ability to pay back a mortgage loan.

The credit utilization refers to how much of your credit limit you are using. The goal is to get your credit utilization below 30%. As an example, if your credit card limit is $1,000, then you want your balance below $300 at all times.

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Having a credit score in the “Fair” range could make it seem like your options for a home loan are limited, but that’s not entirely true. There are specific loan programs designed to cater to individuals with credit scores around 650. Let’s discuss some of these viable home loan options.

FHA Loan

An excellent avenue for potential homeowners with a credit score of 650 is the Federal Housing Administration (FHA) loan. These loans offer competitive interest rates and require a down payment as low as 3.5%, making it an attractive option for first-time homebuyers and those with moderate income levels. The relaxed credit requirements and lower down payment make it considerably easier for individuals with a 650 credit score to qualify.

FHA loans also can be used to rehabilitate the home you are buying, or even purchase a lot and build your dream home. Refinancing with or without cashing out equity is also available.

USDA Loan

The U.S. Department of Agriculture (USDA) loan program is another option to consider, providing financing for low to moderate-income borrowers in rural areas. With a 650 credit score, individuals may be eligible for a USDA loan without requiring any down payment. While these loans do not set specific minimum credit score requirements, they are well-suited for individuals who meet the income and location criteria, offering an excellent opportunity for those seeking homeownership without a substantial down payment.

VA Loan

For veterans, active-duty service members, and eligible surviving spouses, the VA loan program offers favorable terms and does not set a minimum credit score requirement. Even though a 650 score is generally considered acceptable, each lender might have their own threshold.

VA loans provide significant benefits such as no down payment, no private mortgage insurance requirement, and competitive interest rates, making them an appealing choice for those who have served or continue to serve the country.

Each of these home loan types has its unique advantages and eligibility criteria, so it’s important to discuss your options with one of our loan officers to see whether it is the right program for you.

When you apply for a mortgage, our loan officer will ask you to provide a variety of documents to to analyze as part of the loan approval process. Here are the main types of documentation that will be needed:

Income Verification

You will need to prove your ability to repay the home loan, so providing income verification is required. Documents such as pay stubs, W-2 forms, and tax returns are standard when applying for a mortgage. These documents offer proof of employment and income stability, reassuring the lender about your financial capability.

Asset Information

In addition to your income, lenders will also want to see information about your assets. This includes statements from bank accounts, retirement or investment accounts, and any other assets you may have. This provides insight into your overall financial stability and can demonstrate your ability to manage finances responsibly.

Remember: The goal here is to provide clear evidence that you have the financial capacity to afford a mortgage.

Credit History

At some point we will request permission to obtain a full credit report from all three major credit bureaus (Experian, Equifax, and TransUnion) in order to assess your payment history, outstanding debts, and the level of risk you pose as a borrower. Reviewing your credit reports before applying for a mortgage is important.

Addressing any inaccurate entries or negative marks on your report can help improve your chances of approval or secure a more favorable interest rate.

You should not pay down high balance accounts until you speak with a loan officer. You may directed to pay off or leave some accounts unpaid until after your mortgage closes.

Employment History

Your employment history is another important aspect of your overall financial health and stability. Lenders will typically request documentation of your employment history such as length of employment and position. This information helps them assess not only your current ability to repay the loan but also provides insight into the stability of your future income.

Proving employment history shows lenders that you have a reliable source of income which is another factor in securing an approval for a home loan with a 650 credit score.

Acquiring and providing the necessary documentation is an essential step in the mortgage application process. It serves as tangible evidence of your financial stability, responsibility, and capability to comfortably manage a mortgage at this stage in your life.

Meanwhile, it is okay of you recently changed jobs and it may also be acceptable of you have gaps in your employment history.

When it comes to obtaining a mortgage, you need to be aware of the potential challenges you may face. One notable aspect is the impact of your credit score on the interest rate for the mortgage. Individuals with a credit score in the range of 640 to 659 can expect to see higher interest rates than those with higher credit scores. 

This is an essential piece of information as it directly influences your monthly payment and the overall cost of homeownership in the long run.

Individuals with a credit score around 650 may also encounter challenges in terms of the down payment requirement. Depending upon the mortgage program, borrowers with lower credit scores may be obligated to put down a higher percentage for the down payment compared to those with better credit scores.

Although programs like FHA will have the same down payment requirement, other programs for investment and non-QM loans will have a different down payment.

This can pose a significant hurdle for prospective homebuyers as it requires accumulating a more substantial sum upfront, which can be challenging for individuals looking to purchase their first home or those facing financial constraints.

Increasing Your Chances for an Approval

Getting approved for a mortgage with a 650 credit score might require some extra attention to your financial situation. The good news is the there are several steps you can take to increase your chances of being approved. This includes focusing on your credit health, reducing debts, and meeting with a mortgage professional to discuss qualifications and next steps.

Paying down outstanding debts will help when applying for a mortgage. Lenders want to see that you’re able to manage your debts responsibly, and reducing your overall debt can help improve your credit score over time.

It’s a good idea to prioritize paying off high-interest debts first, as this can have a positive impact on both your credit score and your financial stability. However, we mentioned earlier that you should consult with a loan officer before paying anything off.

Reducing credit card usage is another important step. If your credit cards are close to their limits, it can negatively impact your credit score. Try to keep your credit card balances below 30% of their limits, as this can demonstrate responsible financial management to potential lenders. The lower credit utilization will also improve your credit scores.

Avoiding new debt will help to get approved. Every new line of credit or loan application triggers a hard inquiry on your credit report, which can temporarily lower your score. If you make any large purchases like a car with a monthly payment, it will reduce the amount you can get approved for.

Some might argue that the process seems overwhelming and perhaps even discouraging, but think of it as an investment in securing not only your dream home but also improved financial stability in the long run. This is where we can help you. Simply complete this short form and we will contact you to discuss your options.