Can I Buy a House With a 654 Credit Score?

Buying a home is a significant financial step. A 654 credit score often allows for homeownership, as it meets minimum thresholds for several loan programs, though it may not unlock the most competitive interest rates. Lenders consider credit scores alongside income, debt obligations, and available assets when evaluating a mortgage application and determining loan eligibility.

Mortgage Credit Score Expectations

Credit scores assess a borrower’s credit risk, indicating the likelihood of timely loan repayment. Lenders use them to determine mortgage eligibility and set interest rates. A higher credit score signals lower risk, potentially leading to more favorable lending conditions.

Credit scores are categorized into ranges, such as excellent, good, fair, and poor. A 654 credit score typically falls into the “fair” to “good” category. This score is often sufficient to meet the minimum requirements for many mortgage products.

Government-Backed and Conventional Loan Programs

Several mortgage programs are available to borrowers with a 654 credit score, each with specific requirements.

FHA Loans

Federal Housing Administration (FHA) loans often require a minimum credit score of 580 for a 3.5% down payment. Borrowers with scores between 500 and 579 may still qualify but typically need a 10% down payment. FHA loans require both an upfront and an annual mortgage insurance premium (MIP), which protects the lender in case of default.

VA Loans

Veterans Affairs (VA) loans offer no down payment for eligible service members, veterans, and surviving spouses. While the Department of Veterans Affairs does not set a minimum credit score, most private lenders look for a score of 620 or higher. Some lenders might consider scores as low as 500. VA loans usually involve a funding fee, which can often be rolled into the loan amount.

USDA Loans

United States Department of Agriculture (USDA) loans are for low-to-moderate income borrowers in eligible rural areas, offering 100% financing without a down payment. While the USDA does not impose a strict minimum credit score, many lenders require a score of at least 600 to 640. A score of 640 or higher often allows for automated approval. Borrowers with lower scores might still qualify through manual underwriting with compensating factors like strong savings or a low debt-to-income ratio.

Conventional Loans

Conventional loans, which are not government-backed, generally require a minimum credit score of 620. With a 654 credit score, borrowers may access conventional loans with down payments as low as 3%. A down payment of less than 20% typically necessitates private mortgage insurance (PMI), an additional monthly cost. Conventional loan options for low-to-moderate income borrowers often require a minimum credit score of 620 and a 3% down payment, and may have income limits. Minimum credit score requirements can vary among individual lenders, even within the same loan program.

Additional Financial Qualification Criteria

Beyond the credit score, mortgage lenders assess other financial factors to determine eligibility and loan terms.

Debt-to-Income (DTI) Ratio

The debt-to-income (DTI) ratio measures monthly debt obligations against gross monthly income. Most lenders prefer a DTI below 43%. Some loan programs, like FHA loans, may allow higher ratios, potentially up to 57%, especially with compensating factors. Conventional loans may allow a DTI of up to 50% for applicants with good credit history or substantial cash reserves.

Income Stability

Lenders require proof of consistent income over at least two years. This is verified through documents such as W-2 forms, recent pay stubs, and tax returns. For self-employed individuals, lenders generally require two years of business and personal tax returns. Employment gaps or frequent job changes may require explanations and could impact eligibility, though they are not always disqualifying.

Down Payment and Reserves

The down payment is the portion of the home’s purchase price paid upfront, and its size can influence loan options and interest rates. While some loan programs require no down payment, others may require 3% to 20% or more, depending on the loan type and property. Lenders also evaluate a borrower’s financial reserves, which are liquid assets available after the down payment and closing costs. These reserves demonstrate the ability to cover mortgage payments for a period, with some lenders requiring proof of two to six months of mortgage payments in reserves.

Preparing Your Mortgage Application Materials

Gathering documentation is an important step before applying for a mortgage. Lenders require various financial and personal records.

Identification and Income

Collect identification documents, such as a driver’s license and Social Security card. Proof of income is essential, including pay stubs from the most recent 30-60 days, W-2 forms from the past two years, and complete tax returns for the last two years. Self-employed individuals will need to provide business tax returns and profit-and-loss statements for the past two years.

Assets and Debts

Bank statements are necessary to verify assets, funds for the down payment and closing costs, and cash reserves. Statements for all existing debts should also be prepared.

Credit Report and Pre-Approval

Review your credit report for accuracy. Discrepancies or errors should be corrected, as they affect your credit score and loan eligibility. Obtaining a mortgage pre-approval is a valuable step. This process assesses your financial situation, indicating the amount you are likely to be approved for and your borrowing capacity before you search for a home.