Most potential buyers will seek financing solutions when preparing to purchase a home. After all, homes are expensive in Georgia, averaging almost $330,000. As a result, your home search will start with seeking a mortgage loan to afford the cost of the home.
Mortgage loans are paid back over time through monthly payments that cover principal and interest, but lenders must first assess the risk of the borrower before approving each loan.
Conventional lenders in this state rely heavily on credit scores to evaluate borrower risk. They also help determine interest rates on the loan. Understanding how credit scores affect conventional loans in Georgia is essential before starting your search for a home.
What Is a Conventional Loan?
The most popular home loan product in the real estate market is a conventional loan. Government entities do not insure conventional loans. This separates them from other loan programs like VA loans, FHA loans, and USDA loans.
Private lenders provide conventional loans to qualified buyers who want to purchase homes. You could buy a primary residence or an investment property if you meet the conventional loan limits.
There are two categories of conventional loans: conforming loans and non-conforming loans. Fannie Mae and Freddie Mac, two entities overseen by the Federal Housing Finance Agency, set the conforming loan limit.
A non-conforming conventional loan is any amount above those loan limits. Only jumbo loans are available for those higher borrowing amounts, and most require a very high down payment and strong credit.
If you are interested in a conventional mortgage loan in Georgia, you must choose a lender and meet their conventional loan requirements. This may include a minimum down payment, a favorable debt-to-income ratio, and a minimum credit score.
Once you receive the loan, you are responsible for paying back the principal balance plus monthly interest until the loan is paid off or you sell the home.
Minimum Credit Score for a Conventional Loan in Georgia
To qualify for most conventional loans in Georgia, you likely need a credit score of 620 or higher. This is the minimum threshold for most private lenders in the state. However, many lenders will have stricter conventional loan qualification requirements and may only consider borrowers with scores of 660 or greater.
This minimum credit score requirement is standard across the country. Some lenders will make exceptions and accept lower credit scores when granting conventional loans, but borrowers may have to meet higher standards in other areas, such as income, debt-to-income ratio, or down payment requirements.
How do Credit Scores Impact Loan Terms?
Your credit history affects more than just your ability to qualify for a conventional loan. It will also affect the interest rate, down payment, and loan amount. These elements combine to determine your monthly mortgage payment, so understanding the impact of your credit on loan terms is crucial.
Interest Rates Based on Credit Score
Once you have qualified for a conventional loan, your credit has the most significant impact on the interest rate for the loan. Interest rates determine how much it costs to borrow the money. The higher the interest rate is, the more money you will pay over the life of the loan.
Since lenders assess borrower risk based on these scores, they will use them to determine what mortgage rate you can get on your loan. A higher credit score makes you more likely to qualify for lower rates, reducing the total loan amount. Borrowers with lower scores present greater risks to lenders, so they will be charged higher interest rates.
Mortgage rates can also fluctuate over the life of your loan if you choose an adjustable-rate mortgage. With a strong credit score and a fixed-rate mortgage, you could lock in a competitive rate for the entire loan life.
Can You Get a Conventional Loan with a Low Credit Score?
Although it is not impossible, you can unlikely qualify for a conventional loan with a weak credit report. A low score reflects either your inability to pay back debt or a short record of doing so. In either case, this makes you a risky borrower, so the lender is unlikely to approve a conventional loan.
However, there are exceptions to standard conventional loan requirements. For example, if you have a lot of money saved and can put forth a large down payment, the lender may be willing to look past the poor credit because you reduce their risk with a smaller loan amount.
Additionally, having very little debt and a solid income could help you overcome a low credit score. Getting approved for conventional loans ultimately depends on the individual lender's policies.
How to Improve Your Credit Score Before Applying?
Planning to buy a house should begin with building up your credit score. You may not be looking at houses right now, but you know that renting will not last forever. At this point, improving your credit should be a priority. Here are a few tips to increase your score and improve your chances of qualifying for conventional loans.
Paying Down Debt
The more debt you have, the more it holds your credit history back. Some types of debt that affect your score include car loans, credit cards, student loans, and home loans, including VA loans.
Paying down your debt is an effective way to raise your score. For credit cards, keep your revolving utilization ratio low. This means paying off the card before the amount owed is too much. If you keep that utilization ratio low, it will positively impact your score.
Pay off some of these debts to erase them from your ledger and boost your credit score before shopping around for conventional home loans.
Avoiding New Credit Inquiries
Additional credit inquiries can also decrease your score. This occurs when a company performs a credit check when you apply for a loan, take on additional debt, or open a new credit card account. Some credit checks do not affect your score, but full-scale inquiries will.
As a rule, you should avoid taking out too many loans, as each additional debt obligation will hurt your score and increase the time it takes to recover. It’s crucial to consider whether a credit check is a hard or soft inquiry. Some loan companies, such as those for government loans or USDA loans, may perform a soft credit check that doesn’t impact your score.
Alternative Loan Options for Lower Credit Scores
Even if you do not meet the conventional loan requirements for credit scores in Georgia, do not give up hope of financing a home purchase. Other loan programs exist to help borrowers with poor credit afford homes.
A Federal Housing Administration (FHA) loan is a government-backed mortgage with lower credit requirements 580. Some lenders may even accept lower scores. These products make it easier for low-credit borrowers to afford homes, though the costs of FHA mortgage insurance and interest rates will be higher. Many lenders require mortgage insurance for these loans.
Another option is a USDA loan from the Department of Agriculture. These loans have no established credit requirement, so it is left up to the lenders. These home loans are available for low-income families seeking houses in rural areas. USDA and FHA loans have down payment assistance options to lower closing costs and make homes more affordable.
Factors Beyond Credit Score That Lenders Consider
Your credit score is one of many metrics in the loan underwriting process. Lenders will look at many factors to determine eligibility for conventional loans, including DTI ratios, gross monthly income, cash assets, employment history, down payment size, and borrower credentials.
For example, the size of a down payment will determine the total loan amount and whether you must pay private mortgage insurance. A larger down payment will increase your upfront costs but can result in a better interest rate, no private mortgage insurance payments, and lower monthly mortgage payments.
The Bottom Line
As you begin the home-buying process, consider how your credit history will affect your borrowing qualifications. Lenders will not give money to borrowers they deem too risky, and a poor credit rating is a red flag.
Typically, you will qualify for a conventional loan if your score is 620 or higher. If not, you may need to be financially strong in other areas to afford conventional loans. Alternatives to a conventional mortgage, like a VA loan, USDA loan, and FHA loan programs, could be available for borrowers with lower scores.
The key to successfully navigating the conventional loan market is planning. Understand where your credit stands and how it will impact your prospects for buying a home in Georgia. It will affect your ability to qualify for a conventional loan, or jumbo loan, and access better mortgage rates that reduce the cost of your monthly payment.
Check your credit score soon and start planning to improve your score and your chances of qualifying for Georgia conventional loans.
