Besides your credit score, the primary factors that influence the size of a home loan you can get are your income and other debts. The more you make and the less you owe, the bigger your potential mortgage.
Without knowing your income, down payment amount, and debt-to-income ratio, it’s impossible to know how much of a home loan you can get with a 650 credit score. But here are a few factors that influence it.
How Much You Can Qualify For
There are many popular rules of thumb for figuring out how much you can borrow through a mortgage, though these won’t hold true everywhere.
Some people recommend borrowing no more than two to two-and-a-half times your annual income.
Many lenders look for borrowers whose debt-to-income ratio, which measures monthly debt payments as compared to monthly income, will be below 43% after getting a mortgage.
Is 650 a Good Credit Score?
Your credit score is a number that ranges from 300 to 850, with higher scores being better than lower ones. Each lender has its own credit requirements for borrowers but tends to use similar ranges when grouping applicants by credit score.
According to Experian, one of the major credit bureaus, the commonly used credit ranges are:
- 300 – 579: Poor
- 580 – 669: Fair
- 670 – 739: Good
- 740 – 799: Very Good
- 800 – 850: Exceptional
That means that you have a fair credit score if your score is 650. It’s not as bad as it could be, but it could be better.
Most lenders look for borrowers who have good credit but that doesn’t mean that you can’t get a mortgage with a fair score. There are plenty of loan programs designed for people who have fair credit.
Loan Programs for Fair Credit Scores
Even if you have fair credit, there are plenty of ways to get a mortgage. However, you’ll need to be ready to pay a higher interest rate and may need to have a larger down payment saved up.
Some of these loans are normal loans offered directly by banks, credit unions, and other typical mortgage lenders. Others are loans offered through special government programs.
These government programs help to get people onto the property ladder or provide assistance or incentives for people who want to purchase specific kinds of homes, such as homes in rural areas.
Conventional Home Loans
A conventional home loan is a standard loan offered by a mortgage provider, such as a bank, credit union, or a specialized lending company.
A conventional mortgage isn’t offered through any specific program, which means there are often fewer restrictions on the properties you can buy using a conventional loan. However, it also means you miss out on the perks of these programs.
With a fair credit score, you should be able to qualify for a conventional home loan, especially if you don’t have a huge amount of debt. However, that doesn’t mean that a conventional mortgage will be cheap.
You can expect a much higher rate than the best rates that banks advertise. You’ll also have to make a 20% down payment if you want to avoid paying for private mortgage insurance. Mortgage insurance increases the monthly cost of owning a home.
If you want to buy a very expensive home, you’ll need a jumbo loan, which can be hard to qualify for if you don’t meet the bank’s minimum credit score requirement. Typically, the requirements for jumbo loans are higher than other loans.
FHA Home Loans
An FHA loan is a loan offered through the Federal Housing Administration. The loans are designed for people with less than perfect credit and limited funds to make a down payment.
With fair credit, you can qualify for an FHA loan with just a 3.5% down payment. To qualify, you’ll need to be purchasing a primary residence and have a debt-to-income ratio under 43%.
The minimum credit score is 500, though if your score is under 580, you have to make a 10% down payment instead.
Lenders are more willing to take on risks when lending through the FHA loan program because the loans are insured by the government. The mortgage lender can get paid even if the borrower misses payments or defaults.
If you meet the program requirements, FHA loans are a good way to get started on the property ladder. You can always refinance to better terms once your credit score improves.
VA Home Loans
A VA loan is a special type of home loan administered by the Veterans Administration. These loans are available to people with fair credit and let you buy a home with no down payment.
Because VA loans are for veterans, you need to meet certain military service requirements. For example, you can get a VA loan by serving in the military for 181 days or more during peacetime, 90 days during wartime, or spending 6 years in the reserves or National Guard.
Military spouses can qualify if their spouse dies in the line of duty or as a result of a service-related disability.
You won’t be able to qualify for a VA loan if you don’t meet one of these requirements.
USDA Home Loans
USDA home loans are available to borrowers who want to purchase a home in a rural area. The program is intended to help support less urban parts of the country.
While you won’t be able to move to the city with a USDA loan, the program is a good choice for those who want a more rural lifestyle. You’ll need a minimum credit score of 640 in most cases. However, you can dodge that requirement if you have extenuating circumstances.
To qualify, you’ll need an overall debt-to-income ratio of 41% or less, and your mortgage payment can’t exceed more than 29% of your gross monthly income. You also need to provide proof of consistent income over the past 2 years.
Credit Unions
Credit unions are like banks, except they’re owned by the people who have accounts at the credit union instead of shareholders. This makes them more willing to work with customers who are dealing with unusual situations.
Working with a local credit union can be a good choice for people who have less than perfect credit. Your credit union will likely be more involved in the community than a large bank and more willing to work with you.
That doesn’t mean that every credit union will lend to anyone who wants a mortgage, but it means you have a better chance of getting your foot in the door, especially if you’ve been a long-time member of the credit union.
Just as with other lenders, expect to make a larger down payment and accept a higher mortgage rate if you get a loan with a fair credit history.
If the combination of a down payment and closing costs are too much, some lenders will let you get a no closing cost loan in exchange for a higher rate.
How Does Improving My Credit Score Impact My APR?
Improving your credit score can have a huge impact on your APR. Whether you’re getting a mortgage or a personal loan, a lender will determine the interest rate it charges based on the information in your credit history.
Having good credit can save you a lot of money.
Imagine you want to borrow $500,000 to buy a home in the city. Here is what you can expect to pay based on your credit score.
Mortgage Loan Payments by Credit Score
| FICO Score | APR | Monthly Payment | Total Interest Paid |
| 760-850 | 2.541% | $1,986 | $215,061 |
| 700-759 | 2.763% | $2,045 | $236,074 |
| 680-699 | 2.940% | $2,092 | $253,075 |
| 660-679 | 3.154% | $2,150 | $273,919 |
| 640-659 | 3.584% | $2,269 | $316,744 |
| 620-639 | 4.130% | $2,425 | $372,892 |
Source: The MyFICO Loans Savings Calculator based on a 30-year fixed loan on August 24, 2021
Having fair credit means paying $439 with each monthly mortgage payment and more than $150,000 more over the life of the loan. If you get a loan with bad credit it’ll be even worse.
Even with average credit, you’re spending a lot more for a mortgage. It’s in your best interest to work toward a higher credit score before applying for a big loan like a mortgage. Having a low credit score will make it much harder to afford a home.
How to Improve Your Credit Score
Building your credit is one of the best things you can do before trying to buy a home. You’ll make it easier to qualify for a mortgage and secure a lower interest rate, which can save you money.
Each lender can use a different FICO credit score model, but there are steps you can take that will improve your credit regardless of the model used.
Your credit score depends on five factors:
Get a Credit Strong Credit Builder Loan
One way to build your credit score is to get a credit builder loan from Credit Strong. This company offers installment loans to rebuild credit. Unlike a traditional loan, these loans help you save money and improve your credit history.
When you get a loan from Credit Strong, you get to choose the monthly payment and the loan term. Each month, you’ll get a bill and send a payment to Credit Strong. Credit Strong reports your payments to each credit bureau each month, improving your credit.
When you finish paying off the loan, Credit Strong gives you access to a savings account with the amount you borrowed from the initial loan, minus admin fees and interest. You get to keep that money, making the program much like a forced savings program.
There is little risk because you can cancel your loan anytime, which means you won’t hurt your credit by missing payments if you fall on hard times.
You can see the Credit Strong credit builder loan plans and pricing here.
Decrease Your Credit Utilization
Lowering your credit utilization is one of the easiest ways to affect your credit in the short term. This ratio compares your credit card debt to your overall credit card limits. The closer you are to maxing out your credit cards, the worse it is for your credit rating.
You can decrease this ratio in two ways: paying down your debt and increasing your credit limit. The best way to tackle this is to not max out your credit cards in the first place.
But you shouldn’t take raising your credit limit off the table either. Many card issuers will be willing to boost your credit limit if you’ve had the card for a while.
Contest Errors on Your Credit Report
If you’re trying to figure out how to raise your credit score 200 points, disputing errors on your credit report is one thing you should look at.
It’s shockingly common for your credit report to contain incorrect information such as duplicate entries or a payment that was incorrectly marked as late. These can give you a much lower credit score than you deserve.
Each credit bureau has a different process for disputing errors. Pull a copy of your credit report from each bureau and see if there are any mistakes, like an auto loan you never applied for. If there are, start the process of correcting them and you could see a huge increase in your score.
Avoid Hard Credit Inquiries
Whenever you apply for a new loan, the lender typically asks one or more credit bureaus for a copy of your credit report. The credit bureaus mark these requests on your credit report as hard inquiries.
Lenders see hard inquiries as a sign of risk. Someone applying for lots of loans in a short period of time might be tight on cash and unlikely to be able to make payments on a new loan. That means that each hard inquiry temporarily drops your score by a few points.
Before you apply for a big loan, avoid adding any hard inquiries to your credit. The good news is that most FICO formulas group mortgage loan applications made in a short period, such as 30 days, into one inquiry on your report. Shopping for a good rate won’t tank your credit.
Conclusion
Getting a mortgage with fair credit is quite possible, but you won’t be able to qualify for the best rates available. If you can afford to wait, it might make more sense to try to boost your credit score so you can qualify for a cheaper mortgage.
