What credit score do you need to buy a house?



GettyImages 1438989404

Having a high credit score makes it easier to qualify for large loans, such as a mortgage, and receive low interest rates. However, depending on your circumstances, you might not be able to quickly improve your credit score before you need to buy a home. So knowing the minimum credit score requirements can be helpful for prospective homebuyers. 

The quick answer is that having a credit score of 620 or higher is helpful, but you may still be able to buy a house with a score as low as 500. But, there’s a lot of nuance you should understand beyond that. Read on and we’ll explain what credit score is needed to buy a house based on the type of mortgage you’re applying for (and what types of scores matter).

Which credit scores do mortgage lenders use?

Before we can get to the minimum score requirements for a mortgage, it’s important to identify which credit scores matter. There are numerous scoring models on the market. 

FICO and VantageScore are competing credit scoring agencies, and they both develop and sell credit scoring models for lenders. Combined, they offer dozens of credit scores, which is one reason your credit scores can vary widely depending on where you check your scores. 

When you apply for a mortgage, most lenders request a special report that includes information from all three of your credit reports (from bureaus Equifax, Experian, and TransUnion) and a FICO score based on each report. The FICO score models are commonly referred to as Classic FICO Scores and individually named as follows:

  • FICO Score 2—Experian/Fair Isaac Risk Model v2
  • FICO Score 5—Equifax Beacon 5
  • FICO Score 4—TransUnion FICO Risk Score 04

Once the lender has all three scores, they’ll often use the middle score to help determine your eligibility and interest rates. Or, if you only have two scores, the lower score. If you’re jointly applying with someone else, the lower score is what matters. But sometimes, the lender uses the borrowers’ average median score. 

Lenders generally use these types of scores and these rules to comply with Fannie Mae and Freddie Mac underwriting guidelines. The two government-sponsored entities (GSEs) purchase many mortgages from lenders, and other investors might prefer buying mortgages that were assessed using the guidelines. 

However, lenders can use other credit scoring models and rules if they want. And they might break with convention if they keep the loan on their books—a “portfolio” loan—rather than sell it to a GSE or investor.

Mortgage lenders will start using newer credit scores in 2024

The Federal Housing Finance Agency (FHFA) supervises and regulates the GSEs, and it announced a change to the required credit score models in October 2022. 

There’s an ongoing long transition period, but mortgage lenders will soon have to deliver the more recently released FICO Score 10 T and VantageScore 4.0 credit scores when selling loans to the GSEs. Which means they might use these scores to determine eligibility and loan terms as well.  

Lenders will temporarily deliver the Classic FICO Scores along with the newer scores when these changes begin. Then, by the fourth quarter of 2025, the Classic Scores will be phased out. There’s still some ongoing discussions about details, but mortgage lenders also might have the option of using information and scores from two credit reports rather than three. 

The minimum credit score by mortgage type

Different types of mortgages tend to have varying minimum credit score requirements. For now, here’s what many lenders require:

  • Conventional loans (620): Many conventional loans—mortgages that aren’t part of government-backed programs—require a credit score of at least 620. 
  • Jumbo loans (680 to 720): Large conventional loans are also called jumbo loans and you may need a credit score of 680 to 720, depending on the lender. 
  • FHA loans (500 to 580): You might qualify for an FHA loan with a credit score of 500 to 579 with a 10% down payment. Otherwise, you might need a credit score of 580 or higher—the good news is that if your score is upward of 580, your minimum down payment might be as low as 3.5%. Finally, applicants who don’t have a credit score can sometimes still get FHA loans. 
  • VA loans (620): The Department of Veterans Affairs (VA) loan program doesn’t have a specific minimum credit score requirement for VA loans. However, lenders that participate in the program and fund the loans often require a credit score of at least 620. But you might be able to qualify with a lower score, especially if you have a large down payment. 
  • USDA loans (580 to 620): The U.S. Department of Agriculture (USDA) also doesn’t set minimum credit score requirements. However, you may need a score of at least 580 to 620 to qualify with many lenders. 

The FICO Score 10 T is designed to generate scores that align with previous FICO Scores and the minimum scoring requirements might be similar. But they could potentially wind up being different for VantageScore 4.0 scores. 

Other factors can affect your eligibility and rates 

In addition to your credit scores, mortgage lenders consider many factors when determining your eligibility and the interest rates for various types of loans. Some of these you can’t control, such as the current market rates, but others will depend on your financial situation and how much you want to borrow:

  • Down payment and loan-to-value (LTV) ratio: A larger down payment can help you qualify for a mortgage with a lower credit score—putting at least 20% down also might help you avoid having to pay for private mortgage insurance. The inverse of your down payment is the LTV ratio. For example, if you put 5% down the LTV is 95%, and 20% down leads to an LTV of 80%. 
  • Debt-to-income (DTI) ratio: Your monthly income compared to your monthly debt payments can be a significant factor. A low DTI may help you qualify for a mortgage even with a lower credit score. 
  • Mortgage reserves: This is easily accessible money, such as money in a checking account or part of your retirement savings, that you could use to pay your mortgage. Having several months’ worth of reserves might be a requirement if you don’t have a high credit score. 

How you plan to use the home can also affect the decision. For instance, it may be easier to qualify for a loan to buy a single-family home that you’ll use as your primary residence than for a mortgage for a vacation home. 

Learn more: Here’s how much you need to earn to afford a $400,000 home 

5 tips for improving your credit when shopping for a home

Having good credit can make qualifying for a mortgage easier and potentially help you save thousands. That’s not an exaggeration—if you compare mortgage rates, you might see that the interest rates can vary by over 1% for borrowers who have a credit score in the 500s compared to those with scores over 760. The lower score could lead to paying hundreds of dollars more in interest each month.

You can work to improve your credit score now in hopes of getting a better rate when you buy. A higher credit score could also help you get a lower rate if you refinance your mortgage later. Here are five tips specifically for people who are shopping for a home: 

  1. Review your credit reports for errors: You are entitled by federal law to get a free copy of your report from each of the three major consumer credit bureaus via AnnualCreditReport.com. We recommend closely reviewing all three of your credit reports to see if there’s erroneous information that could be hurting your scores, such as a late payment you made on time or a past-due account that you never opened. Try to do this early so you have time to dispute and correct errors before applying for a mortgage. Otherwise, having open disputes might complicate the mortgage approval.
  2. Make all your payments on time: Your payment history is one of the most important scoring factors, and making on-time payments can help your credit. Even if an account doesn’t report your on-time payments to the credit bureaus, you don’t want to fall behind and have the account sent to collections because that could still hurt your credit scores.
  3. Don’t apply for new credit: Opening new credit accounts can be important for financing purchases and building credit in the long run. But you generally want to avoid taking out loans or opening credit cards right before applying for a mortgage because the application and new account could hurt your credit scores.
  4. Pay down credit card balances: Your credit card’s reported balance relative to its credit limit—its credit utilization ratio—can be an important scoring factor. If you’re carrying balances, try to pay them down as quickly as possible to increase your credit scores. Even if you pay your bill in full each month, paying down the balance before the end of each statement period might result in the issuer reporting a lower balance, which leads to a lower utilization rate. 
  5. Keep your utilization rate over 0%: Although higher credit utilization rates are generally worse for your credit scores, having a utilization rate in the low single digits could actually be better than 0%. You can do this by paying down the balance before the statement date and then paying it off after the statement closes and before the bill is due. Don’t revolve credit card balances month to month if you can afford to pay the bill in full—there’s no extra benefit to your credit for doing that and you’ll generally incur expensive interest charges.  

The takeaway 

A credit score of 620 or higher can help you have more options when applying for a mortgage. It may be possible to get approved for a mortgage with a score as low as 500, but that’s with specific caveats—that you’re applying for an FHA home loan and that you can make at least a 10% down payment, to name two big ones. 

Know that mortgage lenders often use specific credit score models when reviewing applications. They also may have varying minimum credit score requirements based on the type of loan, your overall creditworthiness, and the specifics of the purchase. If you want to check the scores a mortgage lender is likely to rely on, your best bet is probably to purchase a subscription through myFICO.com. At the time of this writing, it runs $29.95 per month.  

The credit scores you can check for free generally aren’t the ones that mortgage lenders use, but can still be helpful in giving you a sense where you’re at. And some score providers will offer insights on what’s helping or hurting your score. Unless you already have excellent credit, working to improve your credit could increase your chances of getting approved and—perhaps receiving a lower interest rate than you otherwise would.




Source link

About The Author

Scroll to Top