What Credit Score Do I Need To Buy A House?
Your credit score is one of the main factors that lenders consider when determining your eligibility for a home loan. That’s why you want to make sure you have a high enough credit score to buy a house. If it’s below-average, they may charge you a high mortgage rate, which could cost you thousands in interest over the life of your loan. You may even have trouble qualifying for loans at all, which could put your upcoming home purchase in jeopardy.
To help you figure out if you’re ready to buy a home or if you need to spend some time improving your credit score, here’s a guide to your credit score for mortgage and how to navigate a home purchase with less-than-stellar credit history.
What credit score do you need to buy a house?
It varies depending on the loan type and lender you choose. Conventional mortgage lenders usually require a credit score of at least 620. But some lenders are willing to work with borrowers who have bad credit, especially if they have mitigating factors — like large cash reserves or minimal debt.
You may also be able to qualify for a mortgage with below-average credit if you apply for government-backed loans instead of conventional loans. FHA loans, for example, only require a credit score of 500 if you make a 10% down payment, or 580 if you put 3.5% down. VA and USDA loans also have flexible credit score requirements. The government doesn’t set a minimum score for either loan program, so you may qualify even if you have less-than-perfect credit.
What credit scores do mortgage lenders look at when considering you for a loan?
Mortgage lenders typically look at your FICO credit score to determine your eligibility for a home loan. FICO scores are calculated based on the financial information contained in your credit reports. Your payment history and credit utilization ratio are the two main factors that determine your FICO score, but the length of your credit history ranks high on the list too.
Many people believe that they only have one FICO score, but there are actually over a dozen versions. Mortgage lenders don’t use all of them to evaluate your creditworthiness, but they do consider scores from each of the three credit bureaus to give them a better picture of your financial health. If you want to check all three of the credit scores mortgage lenders consider to make sure they’re up to par, you’ll need to purchase them directly from FICO.
Why do credit scores matter for a mortgage?
Your credit score is one of the main factors that lenders consider when evaluating your application because it’s a good indicator of your ability to repay a mortgage. If your credit score is high, that means you pay your bills on time and keep your debt at a manageable level, so you can afford to take on new credit. A low credit score, on the other hand, signals to lenders that you’re financially overextended and unable to meet your debt obligations. Because your bad credit causes lenders to view you as a risk, you’ll have a harder time getting approved for a loan.
Your credit score also affects what interest rate you receive. If you have a low score, lenders will usually charge you a higher rate because they’re taking on more risk by giving you a mortgage. A high mortgage rate could cost you thousands over the life of your loan, so it’s worth improving your credit score before you buy a home.
How to buy a house if you have less-than-perfect credit
Although buying a home with bad credit can be more difficult, it isn’t impossible. Here are some strategies you can use to increase your chances of qualifying for a mortgage.
Option 1: Take some time to improve your credit score
If you have bad credit, consider pausing your home search so you can improve your credit score. Borrowers with good credit have a much easier time getting approved for home loans and receive lower mortgage rates, which saves them thousands in interest.
You can raise your credit score by disputing errors on your credit report, paying your bills on time, and reducing your credit card debt. Depending on what kind of credit event lowered your score, you could see improvement in as little as a few months.
Option 2: Look at mortgage loan programs
A conventional loan is the most common type of mortgage, but it isn’t the only one available to homebuyers. Government-backed mortgages like FHA and USDA loans have more flexible credit score requirements than conventional loans because they’re less risky for lenders. If you’re willing to look into some of the mortgage programs below, you may be able to buy a home even with a bad credit score.
|Loan program||Credit requirements||Description|
|FHA loan||Your credit score must be at least 500 to qualify.||FHA loans are insured by the government and designed for low-income borrowers. They don’t require a large down payment or high credit score, so they’re a good option for borrowers with bad credit and minimal savings.|
|VA loan||The Department of Veterans Affairs, which insures VA loans, doesn’t have minimum credit score requirements. However, the lenders that issue VA loans typically require a credit score of at least 620.||VA loans help veterans and active duty service members afford homes. These loans don’t require mortgage insurance or a down payment, so they may be a good option for buyers with low cash reserves.|
|USDA loan||Many lenders require a score of at least 640, but you may be able to qualify for this loan with a lower score.||USDA loans are zero-down mortgages that help low-to-moderate income borrowers in rural and suburban areas become homeowners. Just like FHA and VA loans, they’re backed by the government.|
|Conventional loan||Most conventional mortgage lenders require a credit score of at least 620.||Conventional loans aren’t backed by the government, so they often have stricter credit score requirements than FHA and VA loans.|
Option 3: Save for a larger down payment
Making a large down payment can help compensate for a bad credit score because it demonstrates your creditworthiness. Saving up for a down payment of 20% or more isn’t an easy feat and shows that you know how to manage your money. Putting extra money down also lowers your loan-to-value ratio and reduces your lender’s risk, which makes you a more attractive borrower overall.
Option 4: Get someone to cosign your loan
When you apply for a home loan with a cosigner, their income and credit score is considered alongside yours. So if they have good credit and reliable income, they’ll bolster your application and make it easier to get approved.
5 ways to increase your credit score
- Check your credit report for errors. Mistakes on your credit report (like missing accounts) can bring down your score, but you can dispute them. Get a copy of your credit report and check it for errors. If you see any mistakes, write a letter to the credit bureau that created the report and ask to have them removed.
- Pay your bills on time. Payment history is one of the main factors that affect your FICO score, so paying your bills when they’re due will boost your credit.
- Limit your spending. Another factor that influences your credit score is your credit utilization ratio, which is the amount of debt you have divided by your credit limit. If you reduce your credit card spending, your ratio and score may improve.
- Pay down your credit card debt. Another way to improve your credit utilization ratio is to reduce your existing credit card debt. Make a monthly budget and identify expenses you can cut to contribute more money toward your debt.
- Avoid closing accounts. Closing old credit accounts can hurt your credit score because it raises your credit utilization ratio and lowers the average age of your accounts, which is a factor that affects your score. So if you can help it, try to avoid canceling your oldest credit cards.
The bottom line
The minimum credit score for mortgages is typically 620, but you may still be able to buy a home if you have a lower score. Government-backed mortgages like FHA and USDA loans usually have more flexible credit score requirements than conventional loans, so they’re worth looking into if you have bad credit. You can also increase your chances of getting a mortgage by making a large down payment, finding a cosigner, or taking a few months to improve your credit score before you purchase a home.
Frequently asked questions
How important is credit score for mortgage?
Your credit score is one of the main factors that mortgage lenders consider when evaluating your application. If you have a below-average score, you may receive a high interest rate or be unable to qualify for a mortgage at all.
What is a good credit score to get a mortgage?
A credit score of 700 or above is considered good, though an excellent score of 800 or above will qualify you for the best interest rates.
Can I get a home loan with a 500 credit score?
You won’t be able to qualify for most home loans with a credit score of 500, but you may be able to get an FHA loan.
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