The better your credit score, the easier it is to get a lower interest rate and a bigger loan from a mortgage lender.
With a 650 credit score, you should qualify for a home loan, but you’ll fall well short of the cheapest possible mortgage rate and the highest available principal balance. Here’s what you should know about the loans you’re likely to get.
Is 650 a Good Credit Score?
Mortgage lenders primarily use three scores to assess your creditworthiness: FICO Scores 2, 4, and 5. All of them use a scale of 300 to 850, which breaks down into the following ranges:
- 300 to 579: Poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very Good
- 800 to 850: Exceptional
A 650 credit score is on the upper end of the “fair” range, but it’s pretty far from optimal. The average credit score for people with a home loan in 2020 was 753.
Still, 650 is close enough to the lower end of the “good” range that most lenders will give you a shot, especially if you have a high income or down payment. Many types of home loans have a minimum credit score requirement between 580 and 640.
A 650 credit score puts you just above the higher credit requirements. So you can qualify in many cases, but your interest rate might be more expensive than you’d like.
Options Available for Someone With a 650 Credit Score
A 650 credit score usually prevents you from receiving the best possible mortgage terms, but you should still be able to at least qualify for many of the most popular types of home loans. Here’s an overview of some of the options available to you.
Conventional Home Loans
Conventional home loans usually require a minimum credit score of 620. That means that you should be able to qualify for one with a score of 650, but it might be a close call, depending on your other qualifications.
To increase your odds of success, make sure you meet the additional application requirements, which include:
- 45% max debt-to-income ratio: To calculate the metric, divide your total monthly debt payment by your gross monthly income, including your would-be monthly mortgage payment.
- 3% minimum down payment: In general, the more you can afford to put down, the more comfortable a lender will be with lending to you.
If you’re a first-time homebuyer, you can qualify for 3% down. If not, you’ll have to put down at least 5%. Either way, you’ll pay private mortgage insurance, but you can cancel it once you reach 20% equity without refinancing, unlike most other loan types.
USDA Home Loans
The United States Department of Agriculture (USDA) helps people in rural areas with lower incomes qualify for home loans. It insures mortgages for specific lenders and reimburses them for 90% of the remaining balances if borrowers default.
USDA home loans are slightly harder to qualify for with a 650 credit score than conventional loans. The USDA doesn’t set a minimum credit score, but the lenders they work with usually require a credit score of at least 640.
Here are the other primary qualification requirements to get a USDA loan:
- 115% of area median income limit: For example, if you live in an area where the gross median income is $35,000, you can’t earn more than $40,250.
- Available in rural areas only: That includes any place with a population below 35,000 people.
- 41% debt-to-income ratio: This upper limit may be less flexible than with conventional loans.
You can qualify for a 0% home loan if you meet all the requirements, but you’ll pay upfront and ongoing mortgage insurance. To get out of it, you’ll have to refinance once you reach 20% equity.
Fortunately, USDA loans often have lower interest rates than conventional loans. That can help you make your loan more affordable even though you have a 650 credit score.
In many cases, traditional banks that provide mortgage loans follow the underwriting guidelines of a third party, such as Fannie Mae, Freddie Mac, or the USDA.
Doing so gives them the ability to sell their loans off or get extra insurance should a borrower default. However, it means they usually have little flexibility in their loan terms.
In contrast, credit unions are often local operations that hold onto their mortgages instead of selling them to a third party. Working with them is usually a much more personalized experience.
As a result, credit union home loans are less consistent than the other loans on this list. That means there’s no standard minimum credit score for one of their mortgages.
However, they tend to have higher standards than other lenders. Simultaneously, though, they’re also more willing to assess your creditworthiness wholistically and negotiate with you.
VA Home Loans
VA loans, insured by the Department of Veterans Affairs, don’t have a universal minimum credit score. However, the lenders who offer them usually have requirements that range from 580 to 640.
With a credit rating of 650, you’re well above the threshold for the less demanding VA loan providers, but you may struggle to get approval from some of the stricter ones. Keep your debt-to-income ratio well below the 41% limit to help your odds.
To be eligible for a VA loan, you must also meet active-duty service requirements. Depending on when and where you serve, those can be anywhere from 90 days to 24 months. You can also qualify as the surviving spouse of a veteran.
If you do meet the VA loan requirements, it’s probably your best option for financing. VA loans allow 0% down payments without charging mortgage insurance. They may also have lower closing costs and interest rates than other mortgage loan types.
FHA Home Loans
Last but not least, you can also qualify for a Federal Housing Administration loan, or FHA loan, with a 650 credit score. In fact, an FHA loan might be the most accessible loan type, with a debt-to-income limit of 50% and lower credit score minimums.
Lenders will usually offer an FHA loan to someone with a credit score as low as 500, as long as they can put down 10%. With a credit score above 580, you could qualify for a down payment as low as 3.5%.
Either way, you’ll pay a mortgage insurance premium until you hit 20% equity, at which point you can get out of it by refinancing into a conventional loan.
However, they usually have lower interest rates than conventional loans, which can help make up for any mortgage insurance costs.
Unfortunately, FHA loans have strict principal balance limits that may restrict the size of the loan you can get. You can look up the rules for your area on the Department of Housing’s website.
Mortgage Rates For Someone With a 650 Credit Score
You’ll usually need to have a FICO score of at least 760 to get the best mortgage rates, and having anything below 680 puts you at risk of receiving an unsustainable one.
Unfortunately, that means that with a relatively low credit score of 650, you fall into a zone where you’re often just qualified enough to get financing but not quite qualified for a loan worth taking.
In most cases, you’d be better off waiting to apply for a mortgage until you’ve built up your credit score, as you stand to save thousands of dollars in interest.
Here’s a demonstration of the interest costs of a mortgage at each credit score range:
Interest Costs and Credit Score Ranges
|FICO Credit Score||Estimated Interest Rate||Total Interest Paid|
|760 – 850||2.762%||$141,587|
|700 – 759||2.984%||$154,401|
|680 – 699||3.161%||$164,764|
|660 – 679||3.375%||$177,464|
|640 – 659||3.805%||$203,541|
|620 – 639||4.351%||$237,700|
With a credit score of 650, your mortgage interest rate would be approximately 3.805%, which would cost you about $203,541 in interest on a $300,000, 30-year loan. If you could increase your credit score by even 30 points, you stand to save over $25,000.
How to improve your credit score
If you have a credit score of 650, it’s probably worth taking the time to fix your credit score to buy a house at an affordable interest rate. You don’t have bad credit, but a higher credit score would save you a lot of money.
Fortunately, that’s usually a lot simpler than you might think. Once you get your credit repair system in place, all you need to do is stay patient and disciplined as you build your credit history.
Here are some steps you can follow to get you closer to where you want to be.
Get a Credit Strong Credit Builder Loan
To improve your credit score as quickly as possible, try to diversify your credit mix and improve your credit history with both revolving and installment debt, like a credit card and personal loan, respectively.
Americans have just under four credit cards on average, so you probably don’t need another one of those, but you might not be as well established with installment debt.
Of course, it’s not wise to take on a loan only to improve your credit history, and most lenders won’t give you money for no good reason anyway. That’s where credit builder loans come in handy.
Instead of the lender paying you your loan proceeds upon approval, they’ll put the money in a savings account. Then you make your monthly payment as usual until you’ve paid off the balance, at which point they release the cash to you.
That way, the lender stays safe while you make your debt payments, and you get to build both your credit and savings over the loan term. At Digital Honey, we highly recommend Credit Strong as the best option on the market.
Decrease Your Credit Utilization
The amount of debt you have outstanding is one of the most significant factors in your creditworthiness under FICO. In fact, it’s worth 30% of your credit score.
One of FICO’s favorite ways to gauge the health of your debt balances is to check your credit utilization, which they consider for both your revolving and installment accounts.
To get your revolving credit utilization ratio, divide your outstanding balance by your total available credit limit. For example, say you have $7,000 in credit card debt split between two cards. If both of them have a limit of $5,000, your credit utilization ratio is 70%.
If you can get that ratio between 1% and 10%, you’ll see the most benefit to your score. At the most, never let it get above 30%.
To calculate your installment utilization, divide your outstanding loan balances by their combined original principal amounts. For example, say you took out a $20,000 auto loan and have $12,000 left on it. You’d have an installment utilization ratio of 60%.
Once again, the lower you can get your ratio, the better. To maximize your credit score, you can pay off all but the last bit of your loan in advance and leave it open.
Contest Errors on Your Credit Report
Roughly 5% of people have errors on their credit report that could cause them to get a more expensive interest rate than they deserve. While it’s not exactly common, it does happen, and it’s worth making sure your report is accurate.
You can get a copy of your credit reports for free every week from Annual Credit Report.com until April 2022 because of the COVID-19 pandemic. After that, you can get a free copy there once a year.
Search all three of your credit reports for inaccuracies. It’s natural to focus on your payment history and outstanding balances, but don’t forget to double-check your personal data like your name and address as well.
If you find any mistakes, send a letter to the credit bureau whose report has the incorrect information and request a change. You can find a template for it on the Consumer Finance Protection Bureau’s (CFPB) website.
Avoid Hard Credit Inquiries
Every time you apply for a new credit account, you add a hard inquiry to your credit report. Each of these can take a few points off your score. Having too many of them can lead to a significant penalty.
Note that these are different from soft inquiries, which occur whenever someone (including you) pulls your credit report for any purpose other than giving you a credit account.
Try to keep the number of hard inquiries on your report below two. That will benefit your score the most. FICO notes that six subsequent inquiries is a big red flag, so keep it below that, if nothing else.
Fortunately, inquiries don’t remain an issue for too long. They should stop affecting your credit after a year and age off your report entirely after two.
Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.