What Credit Score Do I Need to Buy a Home?
Are you interested in the minimum credit score needed to buy a house?
Over my thirty-seven years as a real estate agent, many potential buyers have asked me, “what credit score do I need to buy a house.”
It is one of the most common mortgage questions among first-time home buyers.
As you’ve probably guessed, your credit score is one of the essential factors in purchasing a house.
Buying a home opens you to financial rules, requirements, and assessments.
Lenders assess your suitability for a mortgage through a few methods. Your credit score plays a significant role in what lenders use to determine your financial qualifications or your mortgage rating.
The higher your credit score, the more faith a lender will have in the likelihood of you repaying the loan.
With a good credit score to buy a house, you’ll also enjoy the best mortgage rates.
If you don’t have the best credit score, buying a home can still be possible if you have the lowest acceptable credit score.
But what is the minimum credit score to buy a house? The answer isn’t necessarily straightforward.
Let’s take a look at the minimum credit score for a mortgage.
How Your Credit Score Affects Your Mortgage Rating
Your credit scores influence the interest rate and payment terms you receive from a mortgage lender. Lenders use a risk-based pricing model to determine what mortgage terms they will give you.
When you pay your bills on time, there is an increased likelihood you will get a lower interest rate. However, you’ll likely be given less desirable terms when you have a low mortgage rating.
Over the life of a mortgage, it can make a substantial difference when you have lower credit scores.
What is a FICO Score?
The most popular scoring system used by lenders is the FICO score. It’s named after the Fair, Isaac, and Company, later changed to the Fair Isaac Corporation, a financial analytics business created to provide credit scoring services to businesses.
While there are other credit scoring models, FICO credit scores are the gold standard for the vast majority of mortgage lenders.
It is a straightforward way to see someone’s creditworthiness, and though necessary, it isn’t the only factor lenders consider.
The credit score needed to buy a home varies depending on the type of mortgage you’re looking at. Government-insured programs like FHA or VA loans allow a lower minimum credit score to buy a home.
Conventional loans don’t offer the same protection for lenders, so their credit score requirements are higher. You can read all about bad credit home loans here.
Credit Score Needed to Buy a House By Mortgage Type
There are many types of loans, and each of them has a credit score needed to buy a home. Understanding how to get a mortgage is essential whether you have a good or lousy mortgage rating.
Conventional Loan Requirements to Buy a House
Standard loans that aren’t guaranteed by government programs follow the lending rules set by Fannie Mae and Freddie Mac.
If your credit score is 740 or better, you should find it easier to qualify for a mortgage with lower interest rates.
Having a higher score could allow you to get a loan with less money down and offer better payment options.
Your credit history significantly influences getting the best interest rates with conventional mortgages. It is one of the reasons financial advisors emphasize working on credit scores to get the best mortgage rate.
Minimum score requirements for a conventional mortgage loan will vary from one lender to another, but typically, you should be able to qualify with a score of 620 or more.
However, it is essential to note that you will be paying PMI when you have less than a 20 percent down payment.
PMI stands for private mortgage insurance. It is a type of insurance fee that is charged as protection if a borrower defaults on the loan.
PMI is expensive, so getting rid of it as soon as possible is a good idea. There are also ways of avoiding PMI.
FHA Loan Requirements to Buy a House
An FHA mortgage is the most popular mortgage program for those buying a home with a lower credit score. The credit score range needed to buy a house is lower than other financing programs. You can feel secure knowing your mortgage rating does not need to be pristine.
FHA is a government agency that stands for Federal Housing Administration.
The Federal Housing Administration’s program reduces the risks to lenders, making them happier to take on borrowers with lower credit scores.
To help homebuyers further, they allow down payments as low as 3.5% and the chance to refinance when you haven’t paid down much of the mortgage.
This helps people purchase a house with lower incomes or allows refinancing for borrowers struggling with their monthly payments.
In theory, you only need a credit score of just 580 to be approved for a mortgage with only 3.5% down, though often, the lender will have a higher requirement than this. If you have a 10% down payment, you might get away with a credit score below 580.
There are three main credit bureaus, including Experian, Equifax, and Transunion. Your lender might get reports from all of them. They often have different scores so the lender might take the middle one.
If you apply with a partner, your lender will use the information for the person with the lowest score.
The FHA 203k Mortgage Requirements to Buy a House
If you buy a fixer-upper home, an FHA 203k loan could be an excellent option. With the FHA 203k mortgage, you can roll the cost of repairs needed for a home into one primary loan.
The credit scoring requirements for an FHA 203k are the same as a standard FHA loan.
The debt-to-income ratio requirements can vary among lenders, but you can expect your debt to be less than 43% of your income before tax.
VA Loan Requirements to Buy a Home
If you have served in the military or National Guard or are a widower of a member of the military that died due to active duty, you could benefit from the VA loans program. The VA offers even better terms than the FHA, with no down payment required and lower credit scores.
Other benefits include not requiring mortgage insurance, as you would need to without a 20% down payment otherwise. However, there may be a funding fee to pay, and this could be several percent if you don’t have a down payment.
While the lowest acceptable credit score from the VA isn’t set, the lender you use may have their own minimum that you will need to meet to qualify. With most mortgage lenders, the lowest credit score with a VA mortgage is 580.
Take a look at all the benefits of a VA loan.
USDA Loan Requirements to Buy a House
USDA loans are a type of mortgage that can be used in rural areas. A USDA mortgage is a type of loan backed by the government.
To qualify for this type of home loan, your income needs to fall below 115% of the surrounding area’s median income levels.
There is also a maximum population requirement in order to use this financial product. A mortgage lender is likely to have a minimum credit score of 640 to get a home loan.
Jumbo Loan Requirements For Purchasing a Home
When getting a jumbo loan, you can expect the lender to require a higher credit score. A jumbo loan is higher than the conforming loan limit, which carries a higher risk for mortgage lenders.
Most lending institutions will want to see a credit score above 700.
To get the best mortgage rate, most lending institutions like to see a credit score range higher than 740. The credit requirements and credit limit could potentially differ from lender to lender.
Check with a few lenders to find your available credit.
A Private Lender is an Option With a Low Credit Score
You might need a private loan with a low credit score that falls under the minimum credit scoring requirements.
Real estate investors will provide private financing to some home buyers when they have a low mortgage rating.
The downside to a private mortgage is they come with much higher interest rates. If you have a poor credit rating, getting this home loan can get you into a house while improving your credit scores.
Once you have a higher credit score, you can refinance into one of the better mortgage programs.
It is one of the best ways to get into a home with a bad credit score. Sometimes bad credit score mortgages can be referred to as hard money loans, which are very risky from a borrower’s standpoint.
Frankly, in the long run, you will be better off working on getting a good credit score to buy a house.
There are also first-time buyer mortgage programs worth looking into as well.
What is a Good Credit Score to Buy a House?
Many folks ask what is a good credit score when buying a home.
An excellent score to buy is much different than the credit score needed to buy a house. With a healthy credit score, you will get the best rates.
- An excellent credit score is considered over 800. Having a credit score this high will get the lowest interest rates.
- A score above 740 is considered to be very good.
- Having a credit score between 670-739 is considered a good credit score.
- A credit rating between 580-669 is a fair credit score.
- Below 580 is considered to be a bad credit score.
So, the best credit score to buy a house is anything above 740. A credit score range above this figure will provide excellent mortgage rates. A good credit score might also provide favorable rates at many lending institutions.
As mentioned previously, the minimum credit score for a home loan will probably be 580.
Other Considerations Besides a Good Credit Score When Buying a Home
Though your credit score is critical, it isn’t the only thing lenders look into to make sure you are a risk worth taking.
Down Payment
Larger down payments make it easier for you to win approval as you will be less of a risk. Lenders believe that putting more of your own money into the home will encourage you to work harder to keep up with the payments.
Earnings
The amount of money you have coming in each month is essential. Lenders will look at your gross monthly income, along with your expenses. A lending institution will want to know if there is a big difference between your gross and net income.
Can you afford the monthly payments on your income? Remember, besides your monthly payment, you’ll have other expenses that come with homeownership.
Debt-to-Income
Your debts are also considered, including your potential mortgage payments, and compared against your income. If your debts are more than 43% of your gross income, there could be a problem with approval.
Do you have student loans or auto loans that are hanging over your head? If you can pay these down before a house purchase, it will be helpful.
Your Employment
Lenders typically like to see borrowers with a stable employment history. If you have worked in the same job for a couple of years, this should be enough to please most lenders.
Your Savings
Though you may have stretched your finances to the max to get the down payment, lenders still like to see some savings. They want to know that you have enough money to cover a few months’ expenses should you lose your job.
How to Improve Your Credit Score Before Buying a House
If your credit score is holding you back from getting a mortgage, or you don’t like the interest rates offered, having a better score will help.
However, you should fix your credit issues before beginning the home buying process, as some things will take a while to heal.
Checking Your Reports is Essential Before Buying a House
One of the best ways to start working on your credit is to know precisely where your scores stand.
Here is everything you need to know about getting a free credit report. You can get your free credit score very quickly.
It’s possible to look at your credit reports for free once per year from the AnnualCreditReport.com site. This will show you what the three main credit bureaus have on you, and any mistakes shown in your reports may be pushing your score down.
If you find errors, report them to the bureau concerned, and you could see a quick increase in your score. Mistakes in your credit report will lower your mortgage rating with lenders.
Getting a free copy of your credit report is a no-brainer before buying a home.
Pay Off Your Debts Before Buying a Home
You need to pay them down to see a gradual score improvement if you have debts. Keeping credit card balances low is very helpful. Once you have paid off a card, don’t cancel it even if you don’t use it anymore. This could harm your credit score, making the situation worse.
Use Credit Karma to Improve Credit Scores
Credit Karma is an outstanding financial improvement service that helps you make the best credit decisions. For example, If you are unsure what credit card balances should be reduced first, Credit Karma will answer.
Best of all, Credit Karma is a free service.
Avoiding Late Payments
Paying your bills on time is crucial. Your payment history is a vital piece of information to lenders. When you submit your mortgage application, it will be one of the primary things they research. Missing payments add negative pressure to your score.
Any late payments could be reported to the major credit bureaus, pushing your score down. If you can change lousy payment habits, your score will steadily improve.
Don’t Apply For Additional Credit
When trying to buy a home, one of the worst things you can do is apply for additional credit. Not only could new credit negatively impact your credit score, but it could also cost you your dream home.
Avoiding spending money when purchasing a home is always a good idea. Be a saver, not a spender.
Don’t Close Credit Cards
Contrary to some people’s beliefs, closing your credit cards does not help your score. Closing a credit card increases your credit utilization ratio, negatively influencing your credit score.
Named Credit Card User
If you have a family member with excellent credit, becoming an authorized user on their credit card will help your score.
You don’t even need access to the credit card, and as long as they continue to make payments on time, your score will begin to look better.
Get a Co-Signer
When you don’t have the credit score needed to buy a house, a last resort option is finding a co-signer. By having a co-signer, you will be using that person’s qualifications to ensure the lender is willing to provide a loan.
You’ll essentially be using their mortgage rating to assist in obtaining your financing.
It is vital to do this with someone you trust. Typically, the best person to co-sign a mortgage is a family member.
Final Thoughts on The Credit Score to Buy a House
By now, you realize the credit score needed to buy a house is something to start thinking about early. Credit scores impact every aspect of our financial lives.
By understanding what credit score is needed for each loan type, you can have a goal for getting a mortgage. Working toward improving them will be a significant asset down the road.
About the author: Bill Gassett, a nationally recognized leader in his field, provided the above Real Estate information on what credit score you need to buy a house. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 37+ years.
Are you thinking of selling your home? I am passionate about Real Estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
