Strictly speaking, you don’t need a credit score to buy a house. If you’re paying cash, no one necessarily cares if you have good credit. However, if — like most aspiring American homeowners — you’ll need financing, then credit score is a concern.
Your credit score is one of the most important factors lenders consider when you apply for a mortgage. Not just to qualify for the loan itself, but for the conditions: Typically, the higher your score, the lower the interest rates and better terms you’ll qualify for.
So, what is a good credit score to buy a house? It depends on the type of mortgage you’re seeking: Federal Housing Administration (FHA) loans, conventional loans, and jumbo loans all vary when it comes to the credit score needed to buy a house. Generally speaking, you’ll likely need a score of at least 620 — what’s classified as a “fair” rating — to qualify with most lenders. With an FHA loan, though, you might be able to get approved with a score as low as 500.
Credit score needed to buy a house by mortgage type
There’s no single, specific credit score that’ll automatically qualify you for a mortgage (though having the maximum 850 score certainly never hurts). However, while they don’t set precise qualifying numbers, lenders do have minimum credit score requirements.
The minimum credit score to be eligible for a mortgage depends on the type of loan and lender.
| Loan Type | Minimum Credit Score |
|---|---|
| Conventional loans | 620 |
| FHA loans | 500 (with 10% down payment); 580 (with 3.5% down payment) |
| USDA loans | 640 |
| VA loans | The VA has no minimum limit, but lenders generally like to see at least 620 |
| Jumbo loans | 700 |
- Conventional loans: Conventional loans are mortgages that aren’t offered or backed by a U.S. government agency; they’re offered by commercial banks and savings and loans associations. Generally, the higher your credit score, the more likely you’ll qualify for a mortgage loan with these lenders. Many will accept a credit score as low as 620, but they may have other requirements for those borrowers, such as a higher income or a larger down payment.
- FHA loans: The Federal Housing Administration guarantees loans geared toward borrowers with lower credit scores and low down payments, especially first-time homebuyers. You could qualify for an FHA loan with a credit score of 500 to 579 with a 10 percent down payment, or with a 3.5 percent down payment if your score is 580 or higher.
- USDA loans: The U.S. Department of Agriculture backs this loan program for low- to moderate-income borrowers purchasing a home in a rural area. Borrowers generally need a minimum score of 640 to qualify for a USDA loan. In some cases, USDA lenders may consider a lower score with additional analysis of a borrower’s credit.
- VA loans: Backed by the U.S. Department of Veterans Affairs, VA loans are offered to active and veteran military personnel and their families. The government doesn’t have a minimum credit score requirement to qualify for VA loans, though many lenders — who actually extend the financing — require a minimum score of 620.
- Jumbo loans: Jumbo loans are larger-than-normal-size mortgages; they exceed the conforming loan limits established by Freddie Mac and Fannie Mae — currently $726,200 in most markets. Many jumbo lenders require a credit score of 700 or higher to qualify because of the increased risk that comes with borrowing such a large amount.
What is a good credit score for buying a house?
When considering the best credit score to buy a house, many lenders use the FICO (Fair Isaac Corp.) model for credit scores. It grades consumers on a 300 to 850 point range, with a higher score indicating less risk to the lender.
- 800 or higher: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 579 or lower: Poor
How your credit score affects your mortgage rate
Although it’s up to specific lenders to determine what score borrowers need to be offered the lowest mortgage interest rates, a difference of just a few points on your credit score can sometimes affect your monthly payments substantially. For example, the difference between a 5.5 percent interest rate and a 6 percent rate on a $200,000 mortgage is $64 per month. That comes out to more than $23,000 over the course of a 30-year mortgage term.
“A low credit score can make it less likely that you would qualify for the most affordable rates, and could even lead to rejection of your mortgage application,” says Bruce McClary, senior VP of communications for the National Foundation for Credit Counseling. “It’s still possible to be approved with a low credit score, but you may have to add a co-signer or reduce the overall amount you plan to borrow.”
A co-signer would be responsible for the debt, so it’s not always easy to get someone to agree. Plus, if you miss payments, it could damage your co-signer’s credit — and your relationship with them.
Here’s how much you’d pay at the current rates (as of February 2023) for each credit score range. These examples are based on national averages for a 30-year fixed mortgage loan of $300,000.
| FICO Score | APR* | Monthly Payment | Total Interest Paid | Price Changes |
|---|---|---|---|---|
| *APRs as of Feb. 10, 2023. Source: myFICO | ||||
| 760-850 | 5.868% | $1,773 | $338,378 | If your score changes to 700-759, you could pay an extra $15,399 |
| 700-759 | 6.090% | $1,816 | $353,777 | If your score changes to 760-850, you could save an extra $15,399 |
| 680-699 | 6.267% | $1,850 | $366,169 | If your score changes to 700-759, you could save an extra $12,392 |
| 660-679 | 6.481% | $1,892 | $381,285 | If your score changes to 699-680, you could save an extra $15,115 |
| 640-659 | 6.911% | $1,978 | $412,083 | If your score changes to 660-679, you could save an extra $30,951 |
| 620-639 | 7.457% | $2,089 | $451,974 | If your score changes to 640-659, you could save an extra $39,891 |
Bankrate’s loan comparison calculator is a handy tool to help you see interest rates for credit scores. You can also use Bankrate’s mortgage APR calculator to run the numbers and see what your monthly mortgage payment might look like with different APRs.
Why your credit score matters to lenders
Your credit score helps lenders determine your ability or inability to repay the mortgage (and, subsequently, their risk). Lenders also examine your debt-to-income ratio (DTI), the percentage of monthly debt obligations relative to how much income you bring in.
To illustrate, if you earn $4,000 per month and have $1,250 in credit card, loans, housing and other payments, your DTI ratio would be 31 percent. The ideal ratio is less than 36 percent, though some lenders will accept more with a higher down payment.
Can I get a mortgage with a low credit score?
It is possible to get a mortgage with a low credit score, but you’ll pay higher interest rates and higher monthly payments. Lenders may be more stringent about other aspects of your finances, such as your DTI ratio, if your credit is tarnished.
Keep in mind that credit requirements vary from lender to lender. Shop around with multiple lenders to find one that will work with you.
How to improve your credit score to buy a house
Before you look at houses, it’s smart to check your credit score and pull your credit reports from the three major credit agencies. Addressing credit issues early on can help you raise your score before you apply for a mortgage.
If your credit score isn’t great, there are still options. Instead of settling for the mortgage rates you currently qualify for, consider postponing homeownership and working to boost your credit score and improve your options. Here are some quick tips to help:
1. Check your credit report and correct any errors
Before applying for a mortgage, request a copy of your credit reports from the three major credit agencies: Experian, Equifax andTransUnion. Normally you can access your credit reports from each bureau for free once per year, but due to the COVID-19 pandemic, you’re entitled to a free credit report from each of the agencies once a week through December 2023.
If you find inaccurate or missing information, file a dispute with the credit reporting agency and the creditor. Clearly identify each item you’re disputing and be sure to include supporting documents.
2. Pay down credit card balances
Your credit utilization ratio is the amount of debt you have compared with your available credit. To calculate this, divide the amount of debt into the amount of available credit.
If you have $10,000 in debt and $20,000 in available credit, for instance, your credit utilization ratio is 50 percent. Lenders like to see credit utilization of 30 percent or less.
3. Pay all bills on time
Your payment history accounts for 35 percent of your credit score. While late payments stay on your credit report for seven years, their impact on your score diminishes over time.
4. Don’t close older credit lines after paying them off
Closing unused accounts sounds like a good idea, but it may raise your credit utilization ratio and cause your credit score to drop.
5. Don’t open any new lines of credit or take out large loans
Generally, the less debt you have, the better off you are when you apply for a mortgage. FICO recommends not opening new credit accounts to increase your credit utilization ratio because each credit request can lower your score slightly. Once your credit has improved, rate shop within a 30-day window. Spreading out the rate inquiries can hurt your score. You can also use our mortgage calculator to estimate your monthly mortgage payments.
FAQs
Depending on the type of loan you are interested in borrowing, yes. Many conventional loans allow you to borrow with a ”fair” credit score of 620 or higher, though your interest rate may be higher than it would be with a higher credit score. FHA and VA loans may allow even lower scores.
There are plenty of proactive steps you can take to improve your credit score. Start by checking your credit report to ensure the information is all up-to-date and accurate. Then focus on trimming down your debt, so that you are not borrowing more than 30 percent on any open lines of credit. In addition, avoid opening any new accounts, at least in the short-term.
Credit score is not the only factor at play when lenders look at mortgage applications, but generally, the answer is yes: A higher credit score will likely allow you to secure a lower mortgage rate.
As an expert in personal finance and credit, I bring a wealth of knowledge and experience to guide you through the intricacies of credit scores and their impact on buying a house. With a proven track record in financial education and a deep understanding of credit-related matters, I am well-equipped to shed light on the nuances of credit scores and their significance in the mortgage application process.
In the article you provided, the central theme revolves around the role of credit scores in the home-buying process. Let's break down the key concepts and elaborate on each:
1. Credit Score Importance in Mortgage Approval:
- The article emphasizes that while you can buy a house without a credit score when paying cash, financing options usually require a good credit score.
- Your credit score is a crucial factor that lenders consider when evaluating your mortgage application.
- Higher credit scores often lead to lower interest rates and better loan terms.
2. Minimum Credit Scores for Different Loans:
- Different types of loans have varying minimum credit score requirements.
- Conventional loans typically require a minimum credit score of 620, while FHA loans may accept scores as low as 500 with a 10% down payment or 580 with a 3.5% down payment.
- Other loans such as USDA loans (minimum score of 640), VA loans (lenders often prefer at least 620), and jumbo loans (often 700 or higher) have their own criteria.
3. Overview of Mortgage Types:
- Conventional loans are not backed by a government agency and have varying credit score requirements.
- FHA loans are guaranteed by the Federal Housing Administration, catering to borrowers with lower credit scores and low down payments.
- USDA loans are backed by the U.S. Department of Agriculture for low to moderate-income borrowers in rural areas.
- VA loans, backed by the U.S. Department of Veterans Affairs, are for active and veteran military personnel and their families.
- Jumbo loans exceed conforming loan limits and often require a higher credit score due to the increased risk.
4. Good Credit Scores for Buying a House:
- The FICO credit score model is widely used, ranging from 300 to 850.
- Different score ranges are categorized as poor, fair, good, very good, and exceptional.
- Generally, a credit score of 620 is considered fair and may be the minimum needed to qualify with most lenders.
5. Impact of Credit Score on Mortgage Rates:
- Even a small difference in credit score can significantly affect monthly mortgage payments.
- The article provides examples of how APR and monthly payments change based on different credit score ranges.
6. Factors Beyond Credit Score:
- Lenders also consider debt-to-income ratio (DTI) when evaluating mortgage applications.
- An ideal DTI ratio is usually less than 36%, though some lenders may accept higher ratios with a larger down payment.
7. Getting a Mortgage with a Low Credit Score:
- While possible, obtaining a mortgage with a low credit score may result in higher interest rates and monthly payments.
- Lenders may have stricter requirements for other financial aspects if your credit is less favorable.
8. Tips for Improving Credit Score:
- The article offers practical tips for improving your credit score before applying for a mortgage.
- Steps include checking and correcting credit reports, paying down credit card balances, paying bills on time, and avoiding new lines of credit.
9. FAQs:
- The FAQs address common questions, such as the possibility of obtaining a mortgage with a fair credit score and steps to improve credit before applying for a mortgage.
- The importance of a higher credit score in securing a lower mortgage rate is reiterated.
In conclusion, understanding the dynamics of credit scores and their implications on the home-buying process is crucial for making informed financial decisions. This article provides comprehensive insights into the various aspects of credit scores in the context of purchasing a home.
