What Kind of Home Loan Can I Get with a 650 Credit Score?

If you are planning on buying a home, one of the most critical factors to consider is your credit score. A high credit score usually means more loan options and better interest rates, whereas a low credit score could limit your home loan options. This is why many people ask the question, “What kind of home loan can I get with a 650 credit score?”

A 650 credit score is considered an average credit score, and though it might be enough to secure a home loan, it may not come with the most favorable terms. The good news is, you still have several loan options available to you. Keep reading to learn your various choices and ways to help improve your credit score. 

Is 650 a good credit score?

The major credit bureaus have different credit scoring categories, and a good credit score is between 670 and 739. A 650 is on the high end of the fair credit score category, which ranges from 580 to 669. A 650 credit score will help you qualify for most home loans, but you may end up with a higher interest rate.

What is the average mortgage interest rate with a 650 credit score?

The average mortgage interest rate varies based on your credit score, market conditions, income, and other factors. The average consumer seeking a home loan with a 650 credit score ended up with a 7.45% interest rate in February. 

Factors that can influence the type of home loan you can get

Interest rates normally fluctuate, but in the current market, rates have become more volatile. You can’t control the market rate, but there are some things you have more control over. These factors will influence the type of home loan you can get.

1. Level of income

Home loans have monthly payment schedules. A lender has to feel confident about your ability to stay on top of payments, and a credit score alone may not give them that insight. A lender typically will not give you a loan with a $5,000 monthly payment if you only earn $4,000 per month at your job. That’s extremely risky for the lender.

2. Current debt levels

Your credit score and income level still do not provide the full picture. On the surface, a borrower making $10,000 per month can afford a $3,000 home loan payment each month. But a lender may get cold feet if it discovers the borrower has to keep up with $8,000 per month in financial obligations from other loans. The $3,000 monthly loan payments would take this person’s expenses to $11,000 per month, which dwarfs the $10,000 per month income.

Lenders use the debt-to-income ratio to assess their risk. A lower debt-to-income ratio is more favorable and indicates the borrower has considerable money left over from each paycheck after covering their financial obligations.

3. Down payment

Down payments can help reduce a lender’s risk. If you buy a $500,000 property without making a down payment, the lender is hoping you will pay the full amount plus interest. Borrowers who make a $100,000 down payment on the same property only have to contend with a $400,000 loan balance plus interest. By having a lower amount to borrow, you could get a lower interest rate. A smaller loan balance also means lower monthly payments, which could help your debt-to-income ratio.

4. Type of mortgage

Many borrowers wonder whether they should take out a 15-year or 30-year mortgage. Trimming years off your mortgage can result in a lower interest rate, but you will also have to contend with higher monthly payments. Opting for a 15-year mortgage is less expensive in the long run because you get out of interest payments sooner. But a 30-year mortgage could be more affordable for your monthly budget and can help your debt-to-income ratio. 

Best home loan options with a 650 credit score

Borrowers can pick from several mortgages. Here are some of the best home loan options.

1. USDA loan

Homebuyers seeking a place in a rural area may want to use this loan. Interest rates are competitive, and you do not have to put any money down. The property must be in a qualifying area for you to take out a USDA loan.

2. FHA loan

FHA loans are readily accessible to homeowners with low credit scores. If you make a 10% down payment, you can get an FHA loan even if you have a 500 credit score. If you have a 580 credit score or higher, you can get an FHA loan. The FHA is a conforming loan with limits on how much you can borrow from the lender. Those limits change each year and depend on the area’s cost of living.

3. Conventional loan

Conventional loans are not insured or guaranteed by the government. While they generally have stricter credit score requirements, some lenders offer conventional loans to borrowers with a credit score of 650. However, it may be more challenging to secure favorable terms and interest rates compared to borrowers with higher credit scores.

4. VA loan

VA loans are exclusively for veterans who served in the past or are actively serving. Spouses of military members can also qualify for VA loans. These loans have no down payment requirement, lower rates, lower closing costs, and no private mortgage insurance. 

How to improve your mortgage rates with a 650 credit score

Raising your score can help you qualify for higher loan amounts and help score lower interest rates. Use these strategies to improve your credit score before you get closer to buying your home.

1. Consider a credit-builder loan

A credit-builder loan is a secured loan that has small monthly payments. The lender reports every payment to the credit bureau, which will help improve your score if you pay on time. Because they are secured loans, lenders are more generous with their credit score requirements.

If you are working on building up your credit or improving your credit score, MoneyLion is here to help! Credit Builder Plus (CB+)* is our powerful credit-building membership, and it’s designed to help our members build or repair their credit, save, establish financial literacy and track their financial health. CB+ can help you build or improve your credit with access to a Credit Builder Plus loan.

A Credit Builder Plus loan is a small loan that is held in a secure account while you make monthly payments. As you make payments, they are reported to the major credit bureaus, which can help boost your credit score with on time payments. Plus, you get access to some of the loan funds as soon as they are approved, so you can use them for whatever you need. 

CB+ loan is a smart way to help improve your credit while paying off your debt. By improving your credit score, you can qualify for lower interest rates on future loans or refinancing options. And by paying off your Credit Builder Plus loan on time, you can reduce your debt-to-income ratio, which could also improve your credit score.

2. Lower your credit utilization rate

Paying off existing debt will improve your credit utilization ratio, a factor that makes up 30% of your credit score. It’s optimal to get your credit utilization below 10%, but getting this ratio below 30% can also help increase your score. If you have a $1,000 credit limit and owe $100, you have a 10% credit utilization ratio.

3. Focus on paying down debt

Paying down debt builds your payment history, and it has a better impact if you pay everything on time. Your payment history makes up 35% of your credit score, making it the largest category. Paying down debt consistently improves your credit utilization ratio, so focusing on one objective can improve categories that affect 65% of your credit score.

4. Avoid hard credit inquiries

Most lenders will conduct a hard credit inquiry if you apply for a credit card, loan, or line of credit. These credit checks give lenders more information about you so they can make a more informed decision during the application process. A hard credit inquiry could reduce your score by a few points. It’s easy to recover from a hard credit check, but getting involved with too many hard credit checks can hurt your score in a more meaningful way.

5. Monitor your credit report for errors

Your credit report contains your credit transactions and provides a snapshot of your history. The major credit bureaus – Equifax, Experian, and TransUnion – will each give you a free copy of your credit report annually if you request it. While a credit report can provide good insights that can help you improve your score, some of these reports have mistakes about loan payments, lines of credit, and other details. Correcting those mistakes can add a few points to your credit score.

Building Credit Creates More Possibilities

A 650 credit score will help you qualify for most home loans, but you may get stuck with a higher interest rate. Improving your credit score over time will make it easier to get financing and secure lower rates. Building credit while looking for a new home can put you in a better position when it is time to apply for a loan.

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