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What Credit Score Do I Need to Buy a House?
By Bianca Rodríguez Rojas MONEY RESEARCH COLLECTIVE
Lenders generally require a score of at least a 620 to buy a house. However, the credit score you need also depends on the type of loan you want to qualify for.
An individual’s credit score is important to mortgage lenders because it helps them assess the risk of lending money. With a high credit score, you may have access to more favorable loan terms. In contrast, having a low score may result in higher interest rates, which makes your mortgage more expensive.
Read on to learn more about what’s considered a good credit score to buy a house and the average minimum score needed for each type of mortgage.
Why are credit scores important to mortgage lenders?
A credit score is a three-digit number between 300 and 850 lenders use to assess the risk of lending you money. This is a key factor lenders use to evaluate your creditworthiness and decide if they’ll approve your loan.
A high credit score shows an individual can manage their debt responsibly and increases the chances of getting approved for loans with favorable terms. The most important of these terms include a lower interest rate and higher borrowing limits. The latter, in particular, will determine what house you can buy.
What credit score do I need to buy a house?
While there are two main credit scoring models (FICO and VantageScore), most lenders use FICO scores to assess borrowers’ creditworthiness.
FICO scores are categorized into five categories:
- Very poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: 800 to 850
Mortgage lenders generally require a score of at least a 620 to approve a loan. However, loans backed by the Federal Housing Administration or the Department of Veterans Affairs may approve loans for individuals with lower scores.
While you can get approved for a mortgage loan with a score of 620, keep in mind that you’ll likely pay higher interest rates and a higher down payment.
If you can, consider postponing the home purchase while you repair your credit or hire a credit repair service to help you through the process.
What is the minimum credit score per mortgage type?
The type of mortgage loan you want will also determine the minimum credit score you need for approval. There are several types of mortgage loans, but here we break them into two categories: conventional and government.
Conventional loans
- Conventional loans are the most common type of mortgage loan. Buyers must typically have a score of at least 620 to qualify. These loans are geared towards borrowers with strong credit histories. This is important to keep in mind given that some lenders may require a score that surpasses 660. Conventional mortgages can offer more competitive fixed-rate mortgage rates and flexible terms, but usually require a larger down payment.
- Jumbo loans are a type of conventional loan that exceeds the lending limits set by the Federal Housing Finance Agency (FHFA). Typically, borrowers need a score of 700 or above, along with substantial income and financial reserves. Jumbo loans tend to have stricter underwriting requirements and higher interest rates, as they pose more risk to lenders without government backing.
Government loans
- FHA loans typically require a minimum credit score of 500. These mortgage loans are insured by the Federal Housing Administration and are best suited for borrowers with lower credit scores or smaller down payments (only 3.5%). These loans are popular among first-time homebuyers because they offer more lenient credit and down payment requirements. However, these loans come with mandatory mortgage insurance premiums to protect the lender.
- VA Loans, similar to conventional loans, require borrowers to have a minimum credit score of 620. Unlike conventional loans, VA loans are offered by the Department of Veterans Affairs (VA) and are only available for service members, veterans and their families. Some VA loans lenders don’t require a down payment.
- USDA Loans are backed by the U.S. Department of Agriculture, which doesn’t establish a minimum credit score needed to qualify. However, lenders tend to require a minimum credit score of 580. These loans were created with the goal of helping borrowers with low or moderate incomes purchase homes in rural areas. USDA loans offer competitive interest rates and lower mortgage insurance costs, making them an affordable option for qualifying buyers in eligible rural or suburban regions.
Ways to improve your credit score before buying a house
There are five things you can do to improve your credit score before submitting your mortgage application. These will not only help your financial situation, but also help you secure an affordable interest rate on your home loan.
Here’s what you can do:
Avoid late payments
Making consistent, on-time monthly payments helps improve your credit score because it demonstrates that you’re responsible with your personal finances and can be trusted with additional debt. Lenders place more weight on recent payment history, so making on-time payments in the months or year leading up to your purchase will improve your chances of securing a low interest rate and getting approved for a mortgage.
Keep you credit utilization ratio low
The credit utilization ratio is the percentage of available credit that a borrower is currently using. This ratio shows how you manage available credit. Having a high utilization ratio suggests you may be under financial strain and, therefore, at increased risk of default.
Pay down your debts
Paying down your debts before applying for a mortgage can not only lower your credit utilization ratio, but also reduce your debt-to-income ratio. The latter is a key factor lenders evaluate to ensure you have enough income to handle future mortgage payments.
Check your credit report
Check your credit report to verify that all the information in it is accurate and up to date. You can obtain a free weekly copy of your credit report from all three major credit bureaus (Equifax, Experian and TransUnion) by visiting AnnualCreditReport.com.
Verifying your report allows you to identify and dispute errors to avoid potential issues that could lower your credit score and jeopardize your chances of getting approved for a mortgage loan.
Don’t apply for new credit
When you apply for new credit, it generally involves lenders running a credit check to see your report. This temporarily lowers your credit score. Additionally, taking on new debt could increase your debt-to-income ratio, which makes you appear riskier to lenders. When you’re seen by lenders as high risk, it can potentially affect your mortgage approval or interest rate.