What Credit Score Do You Need To Buy a House?

Buying a house? Sometimes that “investment” is a money pit that’ll drain you drier than the Sahara on a hot day! Yes, you read that right. The American dream of homeownership might not set you up for financial stability. How do you know if it’s right for you? Total costs and interest rates play pivotal roles. Your credit score not only affects your mortgage eligibility but also influences whether now is the right time to buy. Read on to understand what credit score do you need to buy a house and the key financial factors to consider. 

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Do you need good credit to buy a home?

The term ‘good’ credit score varies by the credit scoring models used by mortgage lenders, typically presented as a range rather than a single figure. The two main scoring models are FICO and VantageScore.

According to the FICO scoring model, a good credit score is 670 to 739. On the VantageScore model, a good credit score is 661 to 780. That’s a big range! With a good credit score, you can typically get better interest rates, lower fees, or other favorable terms. 

However, you could still qualify for a mortgage if you’re nowhere near those numbers. The lender will look at your financial picture, including income stability, debt-to-income ratio, total debt, and employment history. Buying a home with a subpar credit score or a past bankruptcy is possible.  

Below are the types of loans you can get based on different credit score ranges, from lowest to highest. Keep in mind that these credit score ranges and eligibility can change based on lenders and other individual criteria. 

Credit Score: 500-580

FHA Loan

These types of loans are backed by the Federal Housing Administration and could be a good fit for someone who has poor credit and doesn’t have much toward a down payment. You’ll be required to pay monthly mortgage insurance, but that’s usually worth the ability to qualify for the loan. Typically, someone with a 500 credit score would be required to put down 10%. Someone with a 580 credit score might only be required to pay 3.5% with an FHA loan.

Credit Score: 580-660

VA Loan

Government-backed VA loans are insured by The U.S. Department of Veterans Affairs. These types of loans do not require a specific credit score, but private VA loan lenders typically have a minimum of 580 to 660 credit scores. 

You or your spouse must also meet the basic Department of Veteran Service Affairs (VA) requirements, including a valid Certificate of Eligibility (COE) and lender credit and income requirements. Also, at least one of the following service history and duties:

• Served 90 consecutive days of active service during wartime
• Served 181 days of active service during peacetime
• 6 years of service in the National Guard or Reserves
• Spouse of a veteran service member who has died in the line of duty, missing in action, or being held as a prisoner of war. 

Visit VA.gov to find out more.

Credit Score: 620+

Conventional Loan

Conventional loans are not guaranteed or insured by the federal government. Every lender has their own credit score criteria but some lenders will allow a score of 620 and a debt-to-income ratio of 50% or less to qualify for a conventional loan.  

Different loans, such as jumbo loans, can fall into the conventional loan category. Generally, conventional loans have stricter qualifying terms than FHA loans, and jumbo loans require a higher income and/or down payment. 

Credit Score: 640+

USDA Loan

The U.S. Department of Agriculture backs USDA loans, and lenders can offer lower interest rates compared to conventional loans because of this government backing. These loans are known for making rural homebuying more affordable with little to no down payment, competitive interest rates, and low monthly payments. Lenders may have their own guidelines in addition to the USDA’s Rural Development Program requirements. 

Here’s a summary of USDA guidelines to qualify for these loans:

• You must be a U.S. citizen or legal permanent resident.
• Demonstrate creditworthiness (repayment history, credit utilization, length of credit history).
• Have at least a 640 credit score.
• Demonstrate stable income.
• Credit history of at least 12 months of no late payments or collections.
• Household income equals or less than 115% of the area median income.
• The property must be your primary residence. 
• The property must be located in qualified rural areas. You can see the USDA’s map here. 

Will I save money on my mortgage with a better credit score?

A higher score can get you better interest rates and terms and reduce the down payment amount required to qualify for the mortgage. However, as we’ve explained, you can still qualify for a mortgage with a low credit score under the right circumstances. Better yet, you can work to increase your credit score over time to help qualify for better terms. 

How can I improve my credit score to get a better mortgage rate?

Fortunately, there are several steps you can take to improve your credit score and get a better mortgage rate in even a few months, although this will not change your existing mortgage rate. Here are the key factors:

• Create a budget: By creating a budget, you can allocate more funds to paying off debt, building an emergency fund, and saving for a down payment. 
• Make on-time payments: On-time payments are the biggest factor in your credit score. Set up automatic payments to avoid missing a payment. 
• Micropayments: If you can’t afford to pay off all debt at once, make micropayments as often as possible. For example, if you are paid bimonthly, you could make bimonthly payments on your credit cards and any other debt. 
• Track credit progress: You can track credit progress with most major and online banks or financial technology companies, including with MoneyLion’s Credit Building feature. You’re also entitled to a free credit report from all three credit bureaus at annualcreditreport.com.
• Authorized user: One of the fastest ways to boost your credit score is by becoming an authorized user on a credit card of someone with a good credit score. If you have a friend or family member with a 740-plus credit score and a long credit history, ask if they’d be willing to add you as an authorized user. They don’t even have to give you the credit card for you to see the credit score boost. 
• Increase income: By increasing your income, you can pay off debt faster or save for a larger down payment, improving your credit score (less debt), and helping you qualify for better mortgage terms. 

What other factors should I take into account?

Lenders look at more than just your credit score. Here are other factors that will weigh into their decision on your loan application:

• Income and assets: Lenders look for stable, increasing income. Significant assets, a larger down payment, or proof of a higher income can all help you qualify for a mortgage, even with a lower credit score. 
• Debt-to-income ratio (DTI): The ratio between your total debt and income. If you have no preexisting debt (such as student loans, car loans, or credit card debt), you can qualify for a larger home loan, even with a lower income or credit score. Lenders prefer a DTI of 43% or less. A DTI of 30% or less can improve your chances of approval even more. 
• Loan-to-value ratio (LTV): This is the ratio of the total loan amount to the appraised value of the property. Lenders prefer a LTV of 80% or less. However, if you’re approved for a mortgage with a lower down payment (such as 3.5% with an FHA loan), your LTV could be much higher. If you’re worried about loan approval, you can save up for a larger down payment to reduce the LTV. 

Should You Buy a House with a Low Credit Score?

With lender comparison, you should be able to qualify for a mortgage even with a low credit score. However, this typically comes with high interest rates and/or fees. To reduce costs, you could qualify for first-time homebuyer assistance to cover closing costs or a larger down payment. 

Likewise, working to build your credit score before applying can help you save more. Remember to save an emergency fund and any down payment funds in a high-yield savings account to maximize interest earnings. Also, if you can afford to buy now with less-than-ideal credit, you may be able to refinance your mortgage rate in the future, and securing the mortgage and house now may be worth it.

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