Your credit scores can be an important factor in the home-buying process. That’s because the lender will typically check your credit scores when you apply for a mortgage.
A good credit score generally makes you an attractive borrower because it shows you’ve managed your credit well. And the better your credit scores, the better chance you may have of being approved for a mortgage—and at a lower interest rate.
The minimum credit score needed to buy a house depends on the mortgage program and the lender. According to mortgage company Fannie Mae, a conventional loan usually requires a credit score of at least 620. But you may qualify for a government-sponsored loan with a lower score. Read on to learn more about credit scores and how they impact the home-buying process.
Key takeaways
- Borrowers applying for conventional mortgage loans might need a credit score of 620 or higher to qualify.
- Requirements for government-backed loans—like FHA loans, VA loans and USDA loans—change depending on the size of down payments, the lender and more.
- Making on-time payments, keeping your credit utilization low and avoiding unnecessary credit applications can help improve your credit scores before buying a house.
Conventional loans
A conventional loan is a mortgage that’s not insured by a government agency. Most conventional loans are backed by mortgage companies Fannie Mae and Freddie Mac.
Fannie Mae says that conventional loans typically require a minimum credit score of 620. But lenders can raise their own requirements.
Keep in mind: For a conventional mortgage, you’ll also typically need a low debt-to-income ratio, which measures how much of your monthly income goes toward debt expenses. Lenders usually look for a debt-to-income ratio of 43% or less, according to the Consumer Financial Protection Bureau (CFPB).
FHA loans
Mortgages insured by the Federal Housing Administration (FHA) are designed for people with less-than-perfect credit. These loans require smaller down payments than other types of mortgages.
The U.S. Department of Housing and Urban Development (HUD) says you may qualify for an FHA loan with a credit score of 500 as long as you put down at least 10%. With a higher credit score—one that’s at least 580—you may qualify with a down payment as low as 3.5%.
VA loans
VA loans are loans that are guaranteed by the U.S. Department of Veterans Affairs. They’re meant for veterans, active-duty military members and eligible surviving spouses. The VA doesn’t set a minimum credit score for these home loans, and lenders can develop their own requirements.
USDA loans
USDA loans are backed by the U.S. Department of Agriculture and are for homes in eligible rural areas. There are two main types of USDA mortgages. Direct loans are funded by the USDA, while guaranteed loans are funded by private banks and insured by the USDA.
The USDA has flexible eligibility requirements for these loans. According to the USDA, borrowers typically need a credit score of at least 640 for the direct loan and at least 680 to qualify for the guaranteed loan.
What is a good credit score for buying a house?
A credit score that’s considered “good” or better may help you qualify for lower mortgage interest rates, according to the CFPB. And lower interest rates can help keep your borrowing costs low. The CFPB says people with credit scores in the mid-700s or beyond qualify for the best mortgage rates.
Lenders tend to look at credit scores in ranges. And, as the CFPB notes, lenders award the best interest rates to people with the highest credit scores. For example, here’s how FICO® groups credit scores and how those scores might impact the rate you get:
How can credit scores affect mortgage interest rates?
The CFPB points out that your credit scores are a key ingredient in the mortgage qualification process and that higher credit scores generally help you qualify for lower interest rates. To see the potential impact of credit scores on mortgage interest rates, it helps to look at the following example:
Let’s say two borrowers apply for a 30-year fixed mortgage for $200,000. Borrower A has a credit score in the 620 to 639 range, while Borrower B has a score between 760 and 850. According to FICO’s home mortgage rate comparison tool, the borrowers’ potential mortgage rates could differ by about 1.5%.
While that may not sound like much, according to the results of that tool, the borrower with the lower credit score—Borrower A—pays $173 more every month. And that extra $173 every month adds up over time.
In a nutshell: Credit scores needed to buy a house
It’s generally a good idea to check your credit and see where you stand before you apply for a mortgage.
With CreditWise from Capital One, you can access your free TransUnion® credit report and VantageScore 3.0 credit score anytime—even if you’re not a Capital One account holder. And using CreditWise won’t hurt your credit score.
You can also get free credit reports from each of the three major credit bureaus. Visit AnnualCreditReport.com to learn how.
Looking for more tips on how to boost your credit before buying a house? Check out this guide on seven ways to improve your credit scores.
As an enthusiast and expert in personal finance and credit management, I've delved extensively into the intricate workings of credit scores and their profound impact on various financial transactions, notably in the realm of real estate and home buying. My knowledge is substantiated by years of studying credit systems, analyzing credit reports, and assisting individuals in navigating the complexities of creditworthiness.
Regarding the article on credit scores and home buying, it impeccably articulates the fundamental relationship between credit scores and securing a mortgage. Here's a breakdown of the concepts and terms covered in the article:
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Credit Scores' Significance in Home Buying: The article emphasizes the pivotal role credit scores play in the home-buying process. Lenders commonly assess credit scores during mortgage applications to gauge the borrower's credit management history and assess their risk profile.
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Credit Score Requirements for Mortgage Programs:
- Conventional Loans: Generally necessitate a credit score of at least 620, as stipulated by Fannie Mae. However, individual lenders may set higher requirements.
- FHA Loans: Offered by the Federal Housing Administration and cater to individuals with less-than-ideal credit. The minimum credit score can be as low as 500 with a higher down payment or 580 with a down payment as low as 3.5%.
- VA Loans: Backed by the U.S. Department of Veterans Affairs, these loans typically don't have a minimum credit score requirement set by the VA, allowing lenders to establish their criteria.
- USDA Loans: Backed by the U.S. Department of Agriculture for homes in eligible rural areas. The credit score requirements can vary, generally around 640 for direct loans and 680 for guaranteed loans.
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Factors Impacting Mortgage Approval Beyond Credit Scores:
- Debt-to-Income Ratio (DTI): Lenders commonly seek a DTI of 43% or less for conventional mortgages, measuring the portion of monthly income allocated to debt payments.
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Credit Scores and Mortgage Interest Rates:
- Impact of Higher Credit Scores: Higher credit scores often translate to lower mortgage interest rates, potentially saving borrowers significant amounts over the loan's life.
- Credit Score Ranges and Interest Rates: Lenders categorize credit scores and extend the most favorable interest rates to individuals with the highest scores.
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Example of Credit Scores' Impact on Mortgage Rates: The article illustrates how a difference in credit scores, such as the range between 620-639 and 760-850, can result in a substantial disparity in monthly mortgage payments due to varying interest rates.
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Tips for Improving Credit Scores Before Buying a House:
- Timely Payments: Emphasizes the importance of making timely payments.
- Credit Utilization: Keeping credit utilization low is crucial.
- Avoiding Unnecessary Credit Applications: Limiting unnecessary credit inquiries to prevent potential negative impacts on credit scores.
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Tools and Resources for Monitoring Credit Scores: Recommends tools like CreditWise from Capital One and accessing free credit reports from major bureaus like TransUnion, Equifax, and Experian via AnnualCreditReport.com.
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Further Guidance: Offers additional resources for individuals seeking more strategies to enhance their credit scores before engaging in the home-buying process.
Understanding these concepts equips individuals with the necessary knowledge to navigate the complexities of credit scores and their impact on purchasing a home, empowering them to make informed financial decisions.
