What Is a Common Credit Score to Buy a House?
Credit scores can be confusing, even for those who are financially savvy. Many people know that a good credit score will boost your chances of getting a mortgage since it shows the lender that you are more likely to repay the loan on time. However, there is also a minimum credit score to buy a house. The minimum credit score to buy a house will depend on what type of mortgage you are interested in.
What Is a Credit Score?
A credit score isn’t just about getting a mortgage and it shows an overall financial picture. The term credit score will usually be a FICO score and it’s a number between 300 and 850 that represents someone’s creditworthiness and the likelihood, if given a loan, that he or she will be able to pay it off. A higher number means better creditworthiness so a person with a score of 850 is almost guaranteed to pay debts, where someone with a score of 300 is considered more likely to miss payments.
Credit Report
The information that is used to calculate your credit score is shown on your credit report. The credit report is a detailed look at how you have handled your debt over the past years. If you have forgotten to pay a bill or paid off a loan then it shows on your report. This is why it’s always important to take a look at your credit report so that you can learn your credit score and check for any errors.
What Credit Score Should You Have When Buying a House?
A common credit score to buy a house is the FICO score. It’s one of the most common scores used by lenders to determine your creditworthiness. This score also helps lenders calculate the fees and interest rates you will pay. The score plays a role in the process but lenders do look at several factors, including property type, assets, debt levels, and income, in order to help determine if you can qualify. Due to this, there won’t be one exact credit score that you need to have in order to qualify.
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Why a Credit Score Matters for a Home Purchase?
Lenders use a credit score as an indication of risk. For most lenders, a lower score means a higher risk. However, being perceived as high risk by a lender because of your credit score isn’t going to be-all-end-all to you getting a mortgage. You should be prepared for how this can translate to the cost of borrowing when you buy a home. The effect of buying a home with a lower than average credit score impacts the interest rate you pay, which then impacts the overall cost of the loan.
Effect on the Interest Rate
Since lenders view credit score as an indicator of how likely you are to repay the loan, you as the borrower will have to pay a higher interest rate if your credit score isn’t that great. Even just a small fraction in the interest rate can make a difference in how much you pay over time.
For example, if you are getting a 30-year loan on a $250,000 home then the difference between a 4% interest rate and a 4.25% interest rate will have you paying a little more than $13,000 extra over the life of the loan.
Limited Types of Loans
A higher interest rate also means higher monthly payments. This can already test the limits of how much you can realistically afford to buy. You will have limited options when it comes to what loans you can get. While an FHA loan does make it more accessible to own a home, there are some drawbacks.
For example, you may have to pay for private mortgage insurance for the life of the loan, which also adds to the total cost of home buying. The loans can also be limited to certain property standards. In a competitive bidding situation, those who have an FHA loan may not be considered.
Credit Score to Buy a House by Loan Type
The credit score to buy a house you will need depends on what mortgage type you choose. Scores will differ depending on if you are applying for a loan insured by the Federal Housing Administration or one by the U. S. Department of Veterans Affairs.
Conventional Mortgage
A conventional mortgage is a home loan that follows the standards set by Freddie Mac and Fannie Mae. They are uninsured so you need to have a good credit score. Most lenders consider scores of 740 or higher to be excellent and you will be able to qualify for a conventional loan with a low interest rate and lower down payment. These loans are best for those with good or excellent credit and these loans require the highest credit score to qualify. However, these loans also have competitive interest rates, as well as flexible repayment periods. Various lenders do have different requirements so be sure to shop around.
FHA Loans
The Federal Housing Administration insures an FHA loan so they are less risky for lenders. They will be easier to qualify for than a conventional loan. You can have a down payment as low as 3.5%. This loan can be a good option for those with lower credit scores. Those who are underwater on their current mortgage may be able to lower their monthly payment and refinance with an FHA loan.
The minimum score you need is 580 and you still only need a 3.5% down payment. However, there technically is no minimum score to qualify for as long as there is a down payment of 10% or more. FHA loans do originate from private lenders and these lenders may have their own credit score requirements. If your lender is looking at all three credit scores then it uses the middle score for consideration.
VA Loans
A VA loan that is insured by the U.S. Department of Veterans Affairs can be a smart option if you meet the requirements. These are available to borrowers who have lower credit scores. The hard part is meeting the eligibility requirements. You need to be a veteran of the military. Spouses of military members who died during active duty can also apply. Another benefit of this loan type is that you won’t need to get private mortgage insurance. There is no minimum credit score to qualify for a VA loan but just like FHA loans, the lender can set its own minimum credit requirements.
USDA Loan
Like some of the other loans, these are also backed by a governmental agency. You can use these loans on qualifying rural or suburban homes. There is no set down payment or minimum credit score requirements but guidelines do recommend a minimum credit score of 640.
Take a look at the mortgage rates below and decide which one works best for you:
Loan Options by Credit Score
While there is no common credit score to buy a house, it does help to see some options based on a range of credit scores.
Having bad credit or no credit at all means that you aren’t likely to get a mortgage unless someone can help you out. An option would be to have a family member purchase the home and then add you to the title. You can then refinance in your name when the credit score improves.
If you have a credit score that is in the 500s then an option would be to get a loan that is insured by the Federal Housing Administration. With this score, you need to be prepared to put down 10%. Someone with this score may have liens and judgments against them. Even though you can get a loan with this score, the lender may require that you pay off these judgments before closing. It’s a sign that you should work on your credit if you can before you purchase a home.
With an FHA loan, you can have a down payment as low as 3.5% but to qualify, you do need a score of 580 or better. You may also get VA loans with a credit score in this range.
Those with a score of 620 or higher have many options. VA-backed loans can be a good option for active military personnel and you won’t have to make a down payment. Conventional loans that aren’t backed by any agency are now an option.
Those who have a credit score of 700 or higher will get better interest rates. In order to truly understand how much of a difference an interest rate can make in your payments, it’s important to use a mortgage calculator. At this level, you can also find a lender who may consider you for a higher value home that needs a jumbo mortgage.
If you have a score of 740 or higher then you will get the best interest rates, especially on a conventional conforming loan. Conventional loans do tend to require higher scores for borrowers. Borrowers with higher scores may also earn a break when it comes to private mortgage insurance, which is required if there is less than 20% put down.
Interest Rate by Score
The credit score to buy a house will affect your interest rate. It helps to have a look at different credit scores and what the interest rate can be.
760 to 850: With this score, it won’t have any impact on your interest rate and you will get the lowest rate possible.
700 to 760: Your score does have a minimal impact on the rate and the percentage will be up to .5% higher than the lowest rates possible.
660 to 699: At this score level, there will be a small impact on the interest rate and you will have slightly higher rates.
620 to 660: There may be a small impact on your interest rate with this score range. Rates can be a bit higher than the lowest ones that are available.
580 to 620: In this range, your credit score is going to seriously affect your rates. Your rates could be 2% to 4% higher than the lowest available.
500 to 580: If you are even offered a mortgage then you will be paying some high rates to the point where you may not even be able to afford your monthly payments and this can mean trouble.
This is a rough guide and your individual circumstances will affect your interest rate. Having a score below 660 can make a mortgage more expensive than it needs to be. How much more expensive your mortgage will be will depend on the size of the loan you are taking on, as well as the rest of your financial history.
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What Factors Go into a Credit Score to Buy a House?
When determining the credit score to buy a house, it helps to know that there is a lot that goes into a credit score. Once you understand this you can make moves that can positively impact your credit score or help you maintain it so you have the best chances of qualifying.
The exact scoring models do vary by lender but the FICO score takes on different variables from your credit reports to compile the score. The score is based on payment history, the amount owed, length of credit history, types of credit, and new credit.
What Other Factors Do Lenders Consider?
Your credit score to buy a house is important but there are also other things that lenders consider.
Income
Lenders look at your income in order to make sure that you make enough money to be able to afford the payments.
Debt-to-Income Ratio
Lenders want to look at your monthly debts to make sure that with your mortgage payment it’s no more than 43% of the gross monthly income. Some lenders will budge on this amount but if the debt-to-income ratio is higher then it could be harder to get a mortgage.
Down Payment
The more you have for your down payment, the easier it will be to qualify for a mortgage and get a lower interest rate. Lenders think you will be less likely to stop making payments if you have already invested a lot of money into the loan. A higher down payment then means you are less risky for lenders.
Savings
Lenders want you to have the funds to pay the mortgage so if your income unexpectedly dries up, they want you to have savings. You will find that most lenders want you to have two months of mortgage payments saved.
Employment History
Some lenders don’t look at this as closely but many lenders like to see that you have worked at the same job or in the same industry for two years. The reasoning is that you have built up a steady stream of income and will be less likely to lose a job if you have built up a longer work history.
Ways to Improve Your Credit
If your score isn’t going to get you the mortgage you want right now, it may be helpful to spend some time working on improving it. There are a number of things you can do but note that there aren’t any real quick fixes unless there is an error on your credit report that is lowering your score.
Pay Bills on Time
Payment history is one of the biggest factors that determine your credit score. Paying all your bills on time is going to make a big difference but unfortunately, this won’t be a fast fix and creditors need to see good bill-paying habits over time.
Keep Balances on Credit Cards Low
You shouldn’t be using more than 30% of the limit on any credit card and the lower, the better. How much credit you are currently using is called credit utilization and it’s a big factor in your credit score.
Check Credit Reports
Look for any errors on your credit report and if you do find something, be sure to dispute it. You will get one free credit report from each of the three credit bureaus every year.
Keep Your Cards Open
Closing a card will reduce the amount of credit you have, which can then increase your credit utilization and affect your score.
Take a Look at Your Credit Mix
If you only have installment loans or credit cards then consider adding another type so you can show a good payment record across diverse credit lines. However, this isn’t something you want to do right before you get a mortgage because it can cause a hard inquiry on your credit report.
Finally,
There is no one credit score to buy a house but having a higher credit score allows you to qualify for more mortgage options and to also get a better interest rate. Having more mortgage options, along with a lower interest rate, will make the home buying process much easier.
If you haven’t checked your credit score, now is the time to do so before you buy a home so you can make any adjustments as needed and start working toward a better score. Start by checking the report and then see what needs work.