You need a credit score of at least 620 to easily get a mortgage.
A score of around 800 can get you lower interest rates and flexible mortgage terms. However, a score that is 500 or below may make it difficult for you to secure a mortgage. The basic credit score required depends on the loan type and lender.
It is still possible to buy a home with a bad credit score. But if you improve it, the mortgage approval process will be smoother.
👉Importance of a Good Credit Score
What Credit Score Is Needed to Buy a House Based on Loan Type
Credit score requirements can vary based on the type of home loan you are opting for:
Conventional Loans’ Minimum Credit Score: 620
Conventional loans are provided by entities like banks and credit unions. They often offer competitive interest rates and flexible repayment terms, ranging from 8 to 30 years.
- Credit Score: The minimum credit score required for this loan is 620. However, some lenders might request a higher score, like 660 or more.
- Down Payment: It may require a down payment of 3% to 20% or even more.
FHA Loans’ Minimum Credit Score: 500
The Federal Housing Administration backs FHA loans. These loans are particularly popular among first-time home buyers. They have a loan term ranging from 15 to 30 years.
- Credit Score: FHA loans are more flexible when it comes to credit scores. Although they approve scores as low as 500, they prefer ones that are 580 or higher.
- Down Payment: A 10% down payment is available for those with a credit score between 500 and 579. However, you will have to pay a 3.5% down payment for a score of 580.
Jumbo Loans’ Minimum Credit Score: 700
Jumbo loans are mortgages that go beyond government-set limits. These loans usually demand a low debt-to-income ratio.
- Credit Score: For jumbo loans, lenders often require a credit score of 700 or higher. However, the exact requirements can differ between lenders.
- Down Payment: Jumbo loans typically need a bigger down payment. It is often around 20% of the home’s price or more. Some lenders may offer options with smaller down payments but at higher interest rates.
VA Loans’ Minimum Credit Score: 620
The U.S. Department of Veterans Affairs offers VA loans to active and veteran military personnel and their families. The loans come with a guarantee from the U.S. Department of Veterans Affairs.
- Credit Score: The government doesn’t set a specific credit score requirement for VA loans. However, many lenders like to see scores of 620 or higher.
- Down Payment: VA loans often don’t require any down payment.
» Credit Score for VA Loan: Read to know more.
USDA Loans’ Minimum Credit Score: 580
The U.S. Department of Agriculture backs USDA loans. These loans help people with low incomes to purchase homes in rural or suburban areas.
To qualify for this type of mortgage, you must buy a single-family home in an approved rural area. Also, your income can’t exceed 115% of the local median household income.
- Credit Score: USDA loans don’t have strict credit score requirements. However, many lenders look for scores of 640 or higher.
- Down Payment: USDA loans don’t require any down payment.
Why Is a Credit Score Needed to Buy a House?
A credit score is like a report card for your money management skills. It provides a numerical representation of how responsibly you’ve handled your credit and debt.
A high score shows that you’ve made on-time payments and haven’t borrowed too much. This increases banks’ trust in your loan repayment capability. A low score may make them wary of lending you funds.
A good credit score can also save you money. When your score is high, the bank might give you a loan with a lower interest rate. This means you’ll pay less money overall.
What Factors Affect Your Credit Score?
A good credit score is crucial for quick loan approval, lower interest rates, and better financial opportunities. It also improves your overall financial stability and flexibility. Some of the major factors that affect your credit score include:
- Timely Payment Record: Your payment history has the most significant effect on your credit score. It demonstrates that you’re a responsible borrower and can be trusted to meet your financial obligations on time. Late payments, defaults, and accounts in collections can lower your score.
- Recent Credit Inquiries: Lenders make a hard inquiry on your credit report when you want to borrow money. They do this to see if you’re a good candidate for a loan and to figure out how risky it is to lend you money. Several recent inquiries signal that you’re looking for credit. This can impact your score and bring it down.
- Length of Credit History: Longer credit histories tend to have a more positive impact on your credit score. They demonstrate that you are financially responsible over time.
- Type of Credit: Lenders want to see your ability to efficiently manage various types of credit. This includes credit cards, installment loans (like mortgages or car loans), and retail accounts.
- Credit Usage: Your credit score can be negatively impacted if your credit card bill is higher than your limit.
Additional Factors Lenders Consider for a Mortgage
Your credit score is crucial to qualify for a mortgage. But it’s not the only one lenders consider. Your mortgage lender will also:
- Verify Your Current Income: Lenders verify your monthly income before they give you a loan. They do this to ensure that you earn enough to cover your loan payments.
- Evaluate Debt-to-Income Ratio: A high debt-to-income ratio can make it difficult to qualify for a mortgage. Lenders typically prefer that your total monthly debts don’t exceed 43% of your gross monthly income.
- Consider Your Down Payment: A larger down payment increases your chances of mortgage approval with a lower interest rate. It also reduces the risk for lenders.
- Check Your Current Savings: Lenders want to make sure that you have enough funds available to pay for your mortgage payment. This is in case your income unexpectedly dries up due to health issues, layoffs, etc.
- Know About Your Employment History: Lenders see a longer work history as a sign of job stability. This signifies a more stable source of income.
How to Improve Your Credit Score Before Buying a House?
It’s a good idea to improve your credit score before purchasing a house. It leads to better mortgage terms and lower interest rates. Here are steps to boost your credit score:
- Check Your Credit Reports and Correct Any Errors: Before applying for a mortgage, get copies of your credit reports from Experian, Equifax, and TransUnion. Review them for errors or discrepancies and dispute any inaccuracies.
- Pay Credit Card Balances: Lenders like to see credit utilization of 30% or less. You can determine your credit utilization ratio by dividing your outstanding debt by your available credit limit. Reduce your credit card balances to lower your credit utilization ratio.
- Pay Bills on Time: Your payment history makes up 35% of your credit score. Consistently pay your bills on time. You can also set up reminders or automatic payments to avoid late payments.
- Don’t Close Old Accounts: A longer credit history positively impacts your credit score. Closing your credit card account can increase your credit utilization ratio and lower your credit score.
- Don’t Open New Credit Accounts: Do not open new credit accounts or take on substantial loans before applying for a mortgage. Multiple credit inquiries can temporarily lower your score.
- Diversify Credit Types: Different types of credit, like credit cards, loans, and retail accounts, can boost your credit score. However, don’t open new accounts solely for this purpose.
- Limit Credit Inquiries: Don’t apply for too many credit cards or loans in a short period. Each application can lower your score due to a hard inquiry.
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The Bottom Line
Lenders usually require a credit score of 620 or more to consider you eligible for a loan. However, this credit score requirement depends on several factors. It includes the lender’s specific criteria and the type of loan you’re applying for.
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Frequently Asked Questions
What is a FICO score?
Mortgage lenders most commonly use the FICO (Fair Isaac Corp.) score to determine creditworthiness. It grades consumers between 300 to 850 points. Secondly, it helps lenders calculate the interest rate and fees you’ll pay on your mortgage.
Will I get a better deal on a mortgage with a higher credit score?
Yes, having a higher credit score typically leads to better mortgage offers. Lenders view higher scores as lower credit risk and offer low interest rates and favorable loan terms.
What’s the minimum credit score I need to buy a house?
A credit score that is typically considered favorable for home loan approval is 620 or above. However, some loans like FHA loans may accept lower scores even in the 500s.
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