Mortgage 101

What Credit Score Do I Need to Buy a House?

By Arlene Isenburg on November, 17 2021
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Arlene Isenburg

A credit score is a number based on a person’s credit history that indicates his creditworthiness and is used by lenders to determine if a borrower is likely to pay them back.


So it goes without saying that your credit score impacts your mortgage application. 
FICO and VantageScore are the most common credit scoring models, and while they have some scoring differences, they are generally the same. They both use the 300-850 point range and both calculate your credit score based on information collected from the three national credit reporting agencies--Experian, Equifax and TransUnion. The financial factors that make up your credit score include but are not limited to collections accounts, payment history and length of credit history. With both scoring models, the higher the score, the better.



What Credit Score Do I Need to Buy a House?


There is no hard and fast rule that you must have a certain credit score to be able to buy a home, because loan requirements vary. And while your credit score is a big factor in your loan eligibility, it isn’t the only thing that lenders use to determine if they will give you a loan. Other aspects of your finances, like your income, assets, down payment, debt-to-income ratio,
loan-to-value ratio, employment history and savings also matter and are taken into consideration. But there are some general credit score minimums for the different types of loans, and requirements also vary from lender to lender.



Conventional Mortgage


For conventional mortgages, (that is, loans offered by most traditional lenders) the minimum credit score needed is 620. This is because the loans are not insured by the government (unlike FHA loans), so there is more risk to the lender. As such, these loans require a higher credit score and are generally a good fit for someone with a good to excellent credit score. The higher credit score requirement enables lenders to offer more competitive interest rates and flexible mortgage terms. A credit score under 620 would bring about much higher interest rates.


FHA Loans


These loans are insured by the Federal Housing Administration (FHA), which is part of the Federal Department of Housing and Urban Development (HUD). While the FHA sets the rules and guidelines for these loans, it is not the FHA that actually does the lending; traditional, private lenders offer these loans and follow the rules set by the FHA. Since these loans are backed by the FHA, there is less risk to the lender, meaning they can accept below-average credit scores (typically a score of 500 with a 10% down payment or a score of 580 with a 3.5% down payment). Due to allowing lower credit scores, these loans are considered to be the most friendly loan for first-time buyers, because they are easier to qualify for.


VA Loans


Backed by the
U.S. Department of Veterans Affairs, these loans are only available to members/veterans of the military and their spouses. These loans typically require a score of 580 (but are flexible with lower credit scores), offer below market interest rates and are more forgiving of other credit-related issues, like bankruptcies. VA loans also have no down payment requirement, no maximum loan amount and no PMI requirement. As appealing as these loans are, eligibility is strict, so many people do not qualify.


USDA Loans


USDA loans, also called “
Rural Housing Loans,” were created to encourage housing development and growth in rural areas, but they are an option for suburban buyers too. They typically require a credit score of 640, but some lenders will allow a score of 620. Because it is backed by the U.S. Department of Agriculture (USDA), interest rates are below-market and there is no limit to the price of the home. There is an income limit of 115% of the local median income, and borrowers must pay PMI, but the PMI for these loans tend to have lower fees than FHA loans. USDA loans do not require a down payment.



Ways to Improve your Credit

Nothing will fix your credit overnight, but there are many steps you can take to gradually increase your credit score.


Become an authorized user of a parent/loved one’s credit card.
This is one way you can passively build credit without actually having to do anything. As an authorized user of a loved one’s card, your credit will rise as they make regular payments.


Reduce your credit card debt.
The credit scoring models factor your credit utilization ratio/rate (how much credit you are using out of your total available credit) into your credit score. This figure has a huge effect on your credit score, accounting for nearly 1/3 of your score on some credit-reporting models.


Don’t miss payments.
Your payment history makes up 35% of your credit score and has the single biggest impact on your score. Just one collection on your credit report can bring down your score by 100 points. So the single best way to improve your credit score is not to miss payments. If you pay all your bills on time, your score will gradually rise, and there will be nothing negative to report to the credit reporting bureaus to bring your score down.


Get a free credit report and check it for errors.
You are entitled to a free credit report from the three reporting agencies every year. You can submit a formal dispute for any mistakes you find, so they can be removed from your credit report.


Don’t
apply for unnecessary credit
. Applying for a credit card or a loan dings your credit score via a “hard inquiry.” The negative impact is small and temporary, but many hard inquiries do add up.



The Bottom Line


So what’s the right credit score for buying a house? That depends on your situation and which loans you are eligible for. Are you a veteran who qualifies for a VA loan? Are you buying a home in the country and qualify for a USDA loan? All loan programs and lenders have different requirements, but it’s safe to say that a credit score of 620 will make you eligible for conventional loans and put you in a good position to get a mortgage. But you can still get a loan with a lower score if you can meet the eligibility requirements. With a lower credit score, however, you will be seen as more of a risk to lenders. That means fewer loan options will be available to you, you will only be eligible for higher interest rates and you may need to make a larger down payment. So while there is no “right” number to be able to buy a home, you should do everything in your power to raise your credit score prior to applying for a mortgage so that you can get the best deal available to you.