A conventional loan is a mortgage that is not offered, secured, and backed by the government.
Private lenders and lending companies make this available to potential borrowers who meet the criteria for a conventional mortgage, like a conventional loan credit score.
According to Dave Ramsey, it is a more popular option than government-backed financing.
As a matter of fact, conventional loans were used for 74% of all new home sales in the first quarter of 2018, according to America’s trusted voice on money and business.
But qualifying for a conventional loan so that you can buy your house requires that you meet certain criteria that can sometimes be confusing for even the savviest consumers.
In this post, Sprint Funding will be focusing on one of the criteria you will have to meet to be approved of a conventional loan — your credit score.
Consumer finance emphasized that credit scores play an important role when you borrow money, so it is wise to get to know what credit scores are and how they work.
Most borrowers would agree to the fact that a good credit score will boost your chances of qualifying for a mortgage because it will reflect how you will be able to repay your loan on time.
Credit scores can be qualified as “good credit scores” and “high credit scores”.
What do these phrases mean? World Education Services presented the four levels of credit scores that you can achieve:
Although most credit scores fall between 600 and 750, financial institutions and mortgage companies prefer borrowers who have “Good” or “Excellent” credit scores.
Mortgage lenders set their own requirements and rates for conventional loans, according to The Mortgage Reports.
You can find mortgage lenders that are flexible and who are willing to negotiate so that you can qualify for a conventional loan with better rates for your financial situation.
As stated by The Mortgage Reports, a 620 credit score, which is leveled as “bad” (in the 300 – 629 scale by World Education Services), is the minimum conventional loan credit score.
But with better credentials like having an excellent credit score of 740 and above with a 20% down payment, you will have the benefit of paying lower rates and a lower monthly payment.
One of the advantages posted by The Lenders Network for conventional loans is “higher credit score minimums (620-640 score required), however, this would have to be accompanied by other criteria like higher down payment, higher rates, and a more strict income guideline.
Since we have established the fact that the minimum conventional loan credit score is ultimately determined by the lender, Experian highlighted that “Lenders may set credit score cutoffs differently according to local or regional market conditions…and in accordance with their business strategies.”
Some mortgage lenders who offer conventional loans may prefer to deal with borrowers who have excellent credit scores, while other lenders may specialize in subprime mortgages for borrowers who have lower credit scores.
Because mortgage companies often consider the financial situation and needs of their borrowers, they design different conventional mortgage products for applicants with different ranges of credit scores.
All these said and considered, mortgage experts agree that having an excellent or exceptional credit score of 760 or greater will let you qualify for the best interest rates on a conventional loan.
It will also make a big difference in the amount of money you pay over the course of the loan.
So if you have a credit score in the higher range, consequently, you can save thousands of dollars in interest payments over the life of your conventional loan.
You may want to dive deeper and learn the impact of each credit score range from Experian.
Credit scores determine how lenders see you when you are going to buy a home with a conventional loan.
The credit score model known as FICO, used by financial institutions, was created by the Fair Isaac Corporation. It is by far the most commonly used credit-scoring system that exists.
MyFico and Consumer Finance shared what a FICO score means or what it represents when you apply for a conventional loan:
Now that you know what your FICO score can say about you to your lender, you can better understand how important it is to at least have a ‘good’ credit score or even an ‘exceptional’ one for what it’s worth.
An example pointed out by MyFICO is the difference in the interest rate that you would have to pay between a FICO score of 620 and 760 which can be tens of thousands of dollars over the life of a loan.
Specifically, on a $216,000 30-year fixed-rate conventional mortgage, a score of 760 or better will pay $189 less a month than a person with a credit score of 620. This would result in a total savings of $2,268 every year. Multiply that by 30 (life of the loan), and you will save a considerable amount of $68,040.
This example shows how crucial it is to improve your FICO scores if it is currently in the lower ranges and to keep them high if they are in the higher ranges.
There are plenty of reliable ways to work on your credit score so you can enjoy the benefits of lower interest rates and save money.
Consider the following standard guidelines in boosting your credit score as presented by World Education Services:
A low minimum conventional loan credit score requirement of 620, which is literally on the fair side of the FICO score range, is considered a subprime mortgage.
This means you will have to pay higher interest rates every month.
A high conventional loan credit score, on the other hand, will save you thousands of dollars in interest paid over the life of your loan.
Liko so, when lenders are the ones who primarily determine the minimum conventional loan credit score, apply for a loan with the peace of mind of knowing how you will be viewed by lenders through your credit score.