Can I Buy a House With a 654 Credit Score?

A 654 credit score falls under the “fair” credit category, which means buying a house is possible but may require some extra effort As a borrower with fair credit, you can still get approved for a mortgage, though your loan options are more limited compared to buyers with excellent scores above 700

The key is understanding what mortgage programs are available to you and taking steps to boost your credit score With the right strategy, homeownership can become a reality even with less-than-perfect credit.

How a 654 Credit Score Impacts Your Mortgage Interest Rate

Your 654 credit score will influence the interest rate and terms you’re offered by lenders. The higher the score, the lower the rate since you’re seen as less “risky” to lend to.

With a score in the fair range, expect to pay a higher interest rate than borrowers with very good or excellent credit. Lenders view fair credit applicants as riskier, so they charge a higher rate to compensate.

On a $200,000 30-year fixed-rate mortgage, the interest rate difference between a 640 score and a 760 score can mean paying $136 more per month and $48,960 more over the full term of the loan.

Boosting your score before applying for a mortgage can potentially save you thousands over time. Even a small increase can make a difference.

Credit Score Requirements for Government-Backed Loans

The good news is that government-backed mortgage programs like FHA, USDA, and VA loans are available to borrowers with lower credit scores. These loans can offer more flexibility if you have fair credit in the 650s.

• FHA loans require a minimum 580 score with a 3.5% down payment. Ideal for first-time buyers.

• VA loans have no minimum score requirement. Designed for military families.

• USDA loans need a 640 minimum score. Specific to rural/suburban areas.

Government programs look at your entire financial profile, not just your score. You can offset fair credit with factors like a steady job, solid income, low debt, and cash reserves.

Strategies to Improve Your Credit Score for a Mortgage

Raising your score can better your mortgage chances and terms. Here are some tips:

• Pay down balances – Lower credit utilization by paying down card balances.

• Dispute errors – Fix any mistakes on your credit reports.

• Make payments on time – Payment history is a big factor in scores.

• Avoid new inquiries – Too many credit checks can lower your score.

• Ask for credit line increases – This can improve your credit utilization.

• Pay down debt – The lower your existing debt, the better.

• Become an authorized user – Get added to a spouse or family member’s older account.

• Limit hard inquiries – Only apply for credit when absolutely needed.

With diligence and patience, you can incrementally improve your score over time.

Qualifying for a Conventional Loan with a Low Credit Score

Conventional loans from private lenders generally require higher scores of at least 620 to 700. But they may still be an option depending on other factors:

Compensating Factors

• Large down payment (at least 20%)
• Significant cash reserves (12+ months’ worth)
• Low debt-to-income ratio (ideally under 36%)
• Strong income and employment history

Federal Housing Administration (FHA) Streamline Refinance

If you already have an FHA loan, you may qualify to refinance into a new FHA loan to get a lower rate. Your existing credit score, payment history, and loan-to-value ratio are assessed.

Look into Lender Programs for Lower Scores

Some lenders offer portfolio loan programs that are more flexible for borrowers with credit challenges. Ask your broker about any options available.

The Impact of Credit Inquiries When Applying for a Mortgage

When lenders check your credit for a mortgage pre-approval or application, it results in a hard inquiry on your credit report. Too many inquiries in a short timeframe can lower your score temporarily.

It’s smart to limit applications to a minimal number of lenders. Pre-qualification checks don’t require a hard pull on your credit, so take advantage of those first.

Also be mindful of new credit applications in the months preceding your home loan application. New credit can make lenders view you as riskier and negatively influence your score and loan options.

Alternatives if You Don’t Qualify for a Traditional Mortgage

If your credit score or debt levels disqualify you from a traditional mortgage, alternatives like manual underwriting or non-QM loans may be available.

Manual Underwriting

The lender reviews your full financial situation beyond just credit scores. You’ll need strong compensating factors.

Non-QM Loans

These nontraditional loans offer more flexibility but also come with higher rates and stricter eligibility requirements. Proceed with caution.

Improve Your Situation

Postponing a home purchase to improve your credit and lower debt obligations can set you up for better loan terms later.

Key Takeaways

• A credit score in the mid-600s makes buying a house possible but more challenging.

• Government-backed FHA, USDA, and VA loans are good options for fair credit borrowers.

• Down payment amount, income, and low debt levels also impact mortgage eligibility.

• Boosting your credit score and financial profile will expand your loan qualifications.

• Alternative programs like manual underwriting exist for those who don’t qualify traditionally.

The bottom line is that homeownership can still be within reach even if your credit score isn’t perfect. Understand all your options and look for ways to improve your financial standing. With persistence and a prudent mortgage strategy, you can achieve your goals.