Can You Buy a House With a 650 Credit Score?

Buying a home represents a significant financial milestone. While a credit score of 650 might not place an individual in the highest credit tiers, homeownership remains a tangible aspiration. This article explores how a 650 credit score can pave the way to purchasing a home, outlining available mortgage programs, other financial considerations lenders evaluate, and practical steps for navigating the mortgage process.

What a 650 Credit Score Means for Homebuying

A 650 credit score falls within the “fair” credit range, indicating a moderate level of credit risk to potential lenders. While it suggests a borrower has managed credit responsibly, there might also be instances of past payment delays or a limited credit history. For mortgage lenders, a score in this range means a closer look at the overall financial picture is necessary to assess the likelihood of consistent loan repayment. Consequently, a 650 score does not automatically disqualify someone from homeownership, but it does influence the types of loans and terms that may be accessible.

Mortgage Programs for a 650 Credit Score

Several mortgage programs are designed to accommodate borrowers with credit scores in the 650 range, offering pathways to homeownership that might otherwise seem out of reach. These programs often feature more flexible credit requirements compared to conventional loans.

The Federal Housing Administration (FHA) loan is a popular option, known for its accommodating credit score requirements. While the FHA itself sets minimums as low as 500, many individual FHA-approved lenders typically prefer a score of 620 or higher for approval. Borrowers should note that FHA loans require both an upfront Mortgage Insurance Premium (MIP) and annual MIP.

For eligible service members, veterans, and surviving spouses, VA loans offer significant benefits. The Department of Veterans Affairs (VA) does not impose a minimum credit score, allowing private lenders to set their own criteria; most lenders, however, typically look for a score of at least 620. A key advantage of VA loans is that they generally do not require a down payment or private mortgage insurance.

Another option for specific borrowers is the USDA loan, which targets low-to-moderate income individuals purchasing homes in designated rural areas. While the USDA does not have a strict minimum credit score, lenders often seek scores of 620 to 640. These loans also frequently offer the benefit of no down payment.

Conventional loans, which are not government-insured, generally have more stringent requirements. While a 650 score is on the lower end for these loans, it may still be possible to qualify, especially if other financial factors are strong. Lenders typically look for a minimum credit score of 620 for conventional loans. However, borrowers with scores in this range may face higher interest rates and will likely be required to pay Private Mortgage Insurance (PMI) if their down payment is less than 20% of the home’s purchase price.

Other Financial Factors Lenders Consider

Beyond the credit score, mortgage lenders conduct a comprehensive review of a borrower’s financial health to determine loan eligibility and terms. This holistic assessment helps them gauge the overall risk associated with extending credit.

Lenders place considerable emphasis on income stability, typically requiring proof of consistent income for at least two years. Acceptable sources of income can extend beyond traditional employment to include retirement distributions, permanent disability benefits, child support, or alimony. For self-employed individuals, lenders usually require two years of business and personal tax returns to verify income levels.

The debt-to-income (DTI) ratio is another important metric, which compares a borrower’s total monthly debt payments to their gross monthly income. Lenders generally prefer a total DTI ratio of 36% or less, though some programs, such as FHA loans, may allow for higher ratios, sometimes up to 50%. This ratio is calculated by summing all recurring monthly debt obligations and dividing that by the gross monthly income. A lower DTI indicates a greater capacity to manage additional housing expenses.

The amount of a borrower’s down payment and available savings also play a significant role. A larger down payment can help offset a lower credit score by reducing the amount of money a lender needs to finance, thereby decreasing their risk. Lenders also review a borrower’s employment history, preferring consistent employment over a period of at least two years. While job changes are not necessarily disqualifying, stability within the same field or an increase in income with a new position is viewed favorably.

Furthermore, lenders assess a borrower’s assets and reserves. These funds are essential for covering closing costs and serve as an emergency fund after the home purchase. Reserves are liquid assets that can cover a certain number of months of mortgage payments.

Navigating the Mortgage Process

Securing a mortgage involves a series of practical steps, beginning with thorough preparation and moving through the formal application and approval phases. Understanding this process can help streamline the journey toward homeownership.

Initially, it is important to understand your budget. Realistically assessing how much home you can afford involves more than just the monthly mortgage payment, incorporating property taxes, homeowner’s insurance, and potential homeowner association fees. Once a budget is established, gathering required documents is a crucial preparatory step. Lenders will typically ask for:
Recent pay stubs (past 30-60 days)
W-2 forms (past two years)
Tax returns (past two years)
Bank statements (past two to three months)
Identification (driver’s license, SSN)
For self-employed: business tax returns and profit and loss statements

Obtaining mortgage pre-approval is a significant step that provides a conditional commitment from a lender regarding the amount they are willing to lend. This process requires submitting the gathered financial documentation, and a pre-approval letter can strengthen offers on a home by demonstrating serious intent to sellers. Reviewing your credit report for any inaccuracies is advisable, as errors can impact loan terms.

After selecting a lender, submitting your formal application initiates the procedural phase. Following application submission, the loan enters underwriting, where an underwriter thoroughly verifies all provided information, including income, assets, and credit history.

As part of the underwriting process, an appraisal will be ordered to determine the property’s market value, and a home inspection is recommended to assess its condition.

The final stage is closing, typically occurring four to eight weeks after the offer is accepted. At closing, all necessary documents are signed, closing costs are paid, and keys to the property are transferred.