UPDATED: October 02, 2022

Are you planning to buy a home, but your credit score is around 650? You might already know that a 650 credit score won’t qualify for the best interest rates, so you need to prepare and ensure that you can get the best possible deal for your credit score.

To help you, we've gathered the best tips and guidance from finance experts and sources online and checked the sites of home loan providers and their requirements.

In the end, we’ll share a unique tip for improving your credit score. Don’t miss out on critical steps to improve your credit score and get a higher-interest home loan than what you can get.

What average mortgage loan can you get with a 650 credit score?

First, we’ll explain the scoring model widely used by lenders. CNBC reported that 90% of creditors refer to your FICO® Score when deciding whether to approve your loan or not. 

You can check the FICO Score categories below to know if 650 is a good credit score.

FICO ScoreRating
Less than 580Poor
580 to 669Fair
670 to 739Good
740 to 799Very good
800 and aboveExceptional

As you can see, the 650 score falls under the fair category. It’s better than the poor but less than the score you need to be included in the higher rank. According to Experian, 714 is the average credit score in the US. 

So how much home loan can you get with a 650 credit score?

We found out that in 2021, the average loan size was $453,000. When we used the myFICO loan savings calculator, here are the estimated interest rates for a 30-year fixed loan.

Type of loan: 30-year fixed

Principal amount: $453,000

FICO ScoreAnnual Percentage Rate (APR)Monthly PaymentTotal Paid Interest
760-8505.935%$2,697$517,942
700-7596.157%$2,762$541,268
680-6996.334%$2,814$560,038
660-6796.548%$2,878$582,930
640-6596.978%$3,007$629,567
620-6397.524%$3,175$689,960

Based on the table above, the average mortgage interest rate you can get with a 650 credit score is 6.978%. 

But you might ask, “What FICO score is needed to buy a house?” You need at least a 620 score because if you have a score lower than 620, it’s likely that lenders won’t approve your loan. If they consider your application, they might offer a higher interest rate which means a costly monthly payment.

In relation to that, what score is considered good for the best home loan?

As you can see from the table, you must have an excellent score to take advantage of lower interest rates. You can have a lower APR if you have a score of 760 compared to your mortgage rate with a 650 credit score.

For example, if you can save $46,637 if you can reach the 660 to 679 range. That’s a $129 monthly savings you can use for other essential expenses.

But when you have a 650 credit score, lenders may also offer adjustable-rate mortgage (ARM) loans. They have a fixed interest rate for an agreed number of years, such as one, three, five, seven, or ten. After a certain number of years, the APR will change annually.

Here are the estimated interest rates for the 7/1, 5/1, and 3/1 ARM. You can check out the rates below for comparison.

Principal amount: $453,000

Loan type: 7/1 ARMLoan type: 5/1 ARMLoan type: 3/1 ARM
FICO ScoreAnnual Percentage Rate (APR)Annual Percentage Rate (APR)Annual Percentage Rate (APR)
760-8503.495%3.193%2.861%
700-7593.717%3.415%3.083%
680-6993.894%3.592%3.26%
660-6794.108%3.806%3.474%
640-6594.538%4.236%3.904%
620-6395.084%4.782%4.45%

You might think it’s a good deal because of the lower APRs: 3.904% to 4.538% instead of 6.978%. But they can be tricky since the interest rate can increase significantly after the set period ends. It also entails more complicated terms than fixed-rate mortgages have.

Here’s another common question: why do lenders charge higher interest rates to individuals with low credit scores? 

It allows them to protect themselves when borrowers can’t pay. Usually, people who have poor credit incur late payments. They may also have a charge-off account that they haven’t paid for an extended period. Naturally, creditors would want to prevent these scenarios by imposing higher APRs.

What are the options for home loans with a 650 credit score?

The minimum credit score required for first-time home buyers varies per loan type. In this section, we’ll share five loan types you can apply for if you have a 650 credit score or below.

1. USDA Loan

The United States Department of Agriculture (USDA) offers several loan options:

  • Single Family Housing Guaranteed
  • Single Family Housing Direct
  • Multi-Family Housing

Requirements

  • You must meet the income eligibility, which varies per state. It must not be greater than 115% of median household income. For example, if you wish to buy a property in Barbour County, Alabama, your income must not be more than $103,500.
  • You must be a US citizen, US non-citizen national, or a qualified foreigner.
  • You must agree to occupy the property personally.

Take note that these houses are located only in qualified rural or suburban areas.

So if you’re asking, what can you do with a credit score of 650, you can apply for USDA loans because you only need a score of 640 to buy a home through USDA.

2. FHA Loan

You can also consider an FHA loan, insured by the Federal Housing Administration (FHA). Like the USDA, the FHA also has single-family and multi-family mortgage programs.

Requirements

  • You must present at least two established credit accounts. 
  • You must have paid your federal debts on time. It means you must not have delinquent taxes, audit disallowances, or other administrative debts.
  • You must present proof of cash gifts that can help with the down payment. They must be verified in writing and signed by the donor.

Most people worry if they can buy a house with a 650 credit score. Fortunately, an FHA loan requires less than the USDA loan because you only need a credit score of 500, so lenders will consider your application.

3. Conventional Loan

The government doesn't back a conventional loan, so it requires a slightly higher score. So what is the minimum credit score for a conventional loan?

You must have a credit score of at least 620, so lenders will consider your conventional loan application.

Although it demands a higher score, some people still choose a conventional loan because it requires less paperwork. Also, it usually has a fixed-rate interest, so you’ll pay the same amount during the term.

Aside from the 620 score, below are the usual requirements of a conventional loan:

Requirements

  • Debt-to-income ratio lower than 43%
  • Downpayment of at least 3%

4. VA Loan

The US Department of Veterans Affairs gives the following loan options if you’re a veteran, qualified service member, or spouse of a qualified individual:

  • Purchase loan
  • Native American Direct Loan (NADL) program
  • Interest Rate Reduction Refinance Loan (IRRRL)
  • Cash-out refinance loan

The website lists the minimum service requirements to qualify for a VA loan.

  • For service members – at least 90 continuous days
  • For veterans – depends on when you served

Fortunately, there’s no minimum score required for a VA loan, but most lenders want to see at least a 620 score from your credit report.

We made a table to show the interest rates for each loan type.

Loan term: 30 years

Principal amount: $453,000

Downpayment: 10% ($45,300)

Loan typeInterest rates
USDA loan6.25%
FHA loan6.5%
Conventional loan6.072%
VA loan6.625%

You can opt for a conventional loan since it generally offers an interest rate of 6.072%.

What additional factors affect your mortgage rates?

Aside from your credit score, we discovered that the following affect your mortgage rates, so your loan APR may vary.

Debt-to-income ratio

DTI is the percent of your monthly income that goes toward your debt. Here’s how to compute it: divide your recurring debt by your monthly income. You must aim for a DTI of 50% or lower.

Lenders will consider you a low-risk borrower if you have a low DTI. As a result, they’ll offer lower interest rates.

Loan-to-value ratio

You can compute the LTV using this formula: divide your home loan amount by the purchase price. We recommend keeping your LTV ratio at 80% or less.

If your LTV ratio exceeds 80%, creditors may require you to pay mortgage insurance. Unfortunately, it can increase your monthly payments.

Income and assets

Creditors will also verify your income and assets to ensure steady employment. They’ll usually ask for a two years proof of income. It helps them determine the loan amount you can afford.

Am I looking at the right credit scores?

You might notice two scoring models: VantageScore® 3.0 and FICO® Score. Between these two, you should check the latter because 90% of lenders use it. You can monitor your score on these platforms:

Lenders generally use the FICO® 8 model, but they can also check your FICO® 2 (Experian) FICO® 5 (Equifax) FICO® 4 (Transunion).

Make sure to monitor your score, especially if you’re planning to apply for a mortgage. It helps you keep track of your credit standing and report inaccurate information that may negatively affect your score.

How to improve your credit score before applying for a mortgage?

We compiled tips on how to reach the ideal score for a home loan (700 and above).

  1. Make sure to pay all of your bills on time.
  2. According to Brian Davis, the founder of Spark Rental, a unique tip for improving your credit score is checking for errors and submitting a dispute to the credit bureaus if you spot any.
  3. Davis also suggested paying your credit balances below 30% of each credit limit.
  4. Shaun Martin, the Chief Executive Officer (CEO) of Denver Home Buyer recommends having a mix of different types of credit to show that you're capable of handling different types of debt.
  5. You must also refrain from closing unused and old accounts because a long credit history improves your score.

Generally, it would take six months of healthy credit activity to reach the ideal score for mortgage applications.

Apply for the right mortgage

Even though you have a credit score of 650, you can still apply for a mortgage. You can look into USDA, FHA, VA, and even conventional loans. 

But you can still improve your score to have lower interest rates and monthly payments. Pay your bills on time, monitor your credit report, have different types of credit, and refrain from closing old accounts.

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