In 2024, it may be hard to find lenders who will make a loan to those with lower credit scores. The probability of economic recession and volatility in the mortgage market have caused most lenders to impose overlays on any loans they offer.
Overlays are standards above and beyond the minimum requirements outlined by government or private investors. Lenders will use overlays to lower risk levels in adverse loan environments.
What that means for borrowers in 2024 is that the minimum credit scores outlined below will almost certainly be higher for most, if not all, of these loans.
It also means that if a lender imposes an overlay during the closing process, buyers might find themselves suddenly unqualified for a loan they thought they could get. It’s prudent for buyers in 2024 to shop toward the low end of their price range and bring a higher down payment than they might otherwise to ensure their loan closes without any snags.
Loan approval is not the only thing to consider. Lenders also look at credit scores when setting your interest rate. A higher credit score demonstrates less risk for the lender, which means they will offer a lower interest rate on the mortgage loan.
On the flip side, lenders will demand higher interest rates from homebuyers with lower credit to help minimize their risk.
FICO has a loan savings calculator that illustrates how improving your credit can save thousands in interest over the life of a mortgage loan.
FHA loans
FHA loans are backed by the government (Federal Housing Administration). Although FHA loans are issued by a lender (bank or credit union), the lender is willing to take on riskier buyers than they would otherwise because the federal government is helping insure that loan.
FHA loans generally require a score of 580 to obtain a loan with a 3.5% down payment. However, if your score is lower than 580, you may still qualify for a loan if you can come up with a 10% down payment.
VA loans
A VA (Veterans Affairs) loan is available for veterans and is partially backed by the government. While a VA loan requires no credit score minimum, no down payment, and no PMI (Private Mortgage Insurance) to qualify, these loans are not made by the Department of Veterans Affairs but are made by private lenders and guaranteed by the VA. Typically, a lender will require a credit score of 620 or higher for a VA loan.
USDA loans
USDA (United States Department of Agriculture) loans are available for homebuyers looking to purchase property in rural areas. Again, the USDA does not require a certain credit score to qualify, but most lenders who write USDA loans look for a credit score of 640 or higher. However, if your score is lower (around 580 or higher), obtaining a USDA loan is still possible, as some lenders will look at other financial and income variables.
Conventional loans
Conventional mortgage loans are offered to homebuyers through lenders, banks, or credit unions and usually require a minimum credit score of 620 to 640, depending on the type and size of the loan. CreditKarma says the average credit score for first-time homebuyers is around 684.
Other options
If you’re establishing an acceptable credit score, some additional resources may help you obtain a home mortgage. Several assistance packages are available for first-time homebuyers, including discounts for first responders, help for renovations, and closing cost assistance. Also, the HUD (Department of Housing and Urban Development) has a catalog of homebuyer assistance options in your state, so be sure to check out which programs you qualify for.
Be persistent, and always ask what other avenues are available.
What impact will credit scores have in 2024?
In the Global Credit Outlook 2024 by S&P Global Ratings, they anticipate further credit deterioration in 2024, especially among lower-rated entities, with nearly 40% of credits facing potential downgrades.
If you want to buy a house right now, it’s more important than ever to consider multiple loans from several lenders to get the best deal that fits your needs.
Also, remember that shopping at the very top of your approval range is a dangerous game when markets are shifting so quickly. If your lender imposes an overlay before you close on the house, you might not be able to get another loan, and you could miss out on your dream home — so keep that in mind when you’re making an offer.
No matter where your credit is in 2024, becoming a homeowner may not be beyond reach. Discuss your credit and subsequent home-buying options with your real estate agent, who may connect you with a reputable loan officer, mortgage broker, or financial advisor.
Every credit situation is different, and these qualified experts can help you optimize your credit and leverage it into the best home-buying situation possible in 2024.
Header Image Source: (Micah Carlson / Unsplash)
