What Credit Score Do You Need to Buy a House?

Careful Cents Team

Careful Cents Team

July 29, 2020  •  5 min read

If you think you need perfect credit to get a mortgage—think again. Not only are there ways to get a mortgage with less than perfect credit, but you can easily do so if you’re a first-time homebuyer. 

Credit requirements for a mortgage are set by individual lenders, so there is no specific credit score that is required across the board. Typically, you want your credit to be free of major red flags—like poor payment history, bankruptcies and other negative marks. That said, even if you have some of those, there is still a chance there is a lender out there that will approve you for a loan.

What Is the Minimum Credit Score Needed for a Mortgage?

Credit scores are one of your many financial markers lenders rely on to evaluate your application. Lenders use your credit to establish how you’ve interacted with debt in the past, ultimately deciding whether they want to issue you a new loan. 

Credit requirements for mortgages vary by lender and are based on the type of loan you want to get. Since there isn’t an industry-standard minimum credit score needed, ask your lender what the range is for the loan you’re looking to apply for. 

Check out Experian to see your credit score and boost your score for paying your bills such as phone, utility and streaming services like Netflix.

The following are popular types of mortgages and the credit requirements associated with each: 

  • Conventional Loans have options for first-time homebuyers to purchase homes with as little as a 3% down payment. With this type of loan you need a credit score of at least 620 to be approved.
  • VA Loans are guaranteed by the Veterans Benefit Administration and are only given to eligible U.S. veterans. Since these loans are only backed by the VA, there are no credit score requirements and each individual bank has their own minimum credit score they’ll accept.
  • USDA Loans are given to homebuyers purchasing property in rural or suburban areas. These loans are issued by the U.S. Department of Agriculture and typically require a minimum credit score of 640 (although this is not an official standard).
  • Jumbo Loans are special mortgages that allow people to purchase homes with values that exceed the limit set by the Federal Housing Finance Agency. Since these loans are so large, they may have stricter repayment requirements and applicants need to have a credit score of at least 680. While you may be approved for a jumbo loan with a lower credit score, your lender may require you to put down a larger down payment and pay a higher interest rate.
  • FHA Loans are federally-backed loans popular among first-time homebuyers. These loans can be some of the easiest to get and require a credit score of at least 580 for approval.

How Does Your Credit Score Affect Mortgage Rates?

Beyond giving them an idea of whether you’ll pay your debt back on time, lenders use your credit score to determine your interest rate. Since there is more perceived risk involved in lending money to a borrower with a lower credit score, lenders often charge higher interest rates to compensate. This makes it more expensive to buy a home, as you’ll pay more in interest over the life of your loan. 

Locking in a low mortgage rate can make a serious difference when it comes to the cost of your home loan. For example, if you have a 700 FICO® Score, which is considered  “good,” you might get an interest rate of around 3.1%. If you’re getting a 30-year mortgage for $200,000, that means you’d pay an extra $107,000 over the life of your loan just in interest. 

Now imagine you had a lower FICO Score of 620, which is considered “fair,” and you had a rate of 4.5%. On the same $200,000 mortgage, you’d end up paying $140,000 in interest over the life of your loan—that’s more than $30,000 more, or $1,000 extra a year. 

In this example, it’s clear having a better credit score can lead to significant savings over the life of a loan. 

How Can You Improve Your Credit to Get a Mortgage?

If you’re worried your credit score is too low to get approved for a mortgage, consider taking some time to fix it before applying for a new loan. Here are a few things you can do to help you raise your credit score: 

  1. Monitor activity on your credit score & reports. Your credit scores are always changing, and it’s important to know where you currently stand. Regularly monitoring your credit score keeps you from being surprised when your score is lower than you expected. It also alerts you to sudden dips, which can be signs of identity theft or fraud.
  2. Pay down revolving debt. Your credit utilization is one of the most important aspects of your credit score and reducing your overall outstanding balances can help you quickly increase your credit score. Try to keep your utilization ratio below 30%. If you’re applying for a mortgage, it will be beneficial to pay down your credit card debt first so your credit score increases, and you can lock in a lower rate.
  3. Avoid applying for new loans or credit lines. If you’re in the process of applying for a mortgage, don’t apply for any new debt until after the mortgage company has approved your loan. New lines of credit can disrupt the underwriting process and throw off your debt-to-income ratios, possibly changing the terms of your mortgage. To avoid this, it’s best to wait to apply for new credit so your financial profiles look the same when closing on your home as they did when you applied for your mortgage.
  4. Wait for your credit score to go up. If you have negative marks on your credit report (like a late payment), look to see when it will drop off your credit history. Most of those damaging marks remain in your credit file for seven years, so if you’re close to the end of that timeframe it may be worth waiting it out. Once these marks fall off your report, your score could shoot up, helping you get approved with a more favorable interest rate.

 

Our Two Cents

If you’re considering getting a mortgage, first check your credit reports and credit score so you know what lenders will see when looking at your application. If you don’t think your credit is in the right place to get approved, take the time to increase your score. 

Even if your credit score is high enough to get approved, consider the savings you can earn by improving your score so you can lock in a better interest rate. While you wait, survey the housing market, research your loan options, and when your credit is in the right place, pull the trigger. Before you actually go on the house hunt, it often helps to get pre-approved by a lender, so you know exactly how much house you can afford.