What is a Good Credit Score to Buy a House

Posted on June 1, 2022 in Mortgage FAQ's

Buying a house can be a complicated process, so it helps to prepare as much as possible before you begin. This includes making sure you’re financially stable enough to shoulder this new responsibility. While it doesn’t provide a complete picture of your financial health, your credit score is a good indicator of your ability to manage money. The higher it is, the more creditworthy you appear to lenders, and the easier it can be to secure the property of your dreams. With such a large scale, what constitutes a good credit score? How can you improve yours to get it where it needs to be? Today, we’re breaking down all of the answers you need to know as you take this exciting step forward.

Related Article: First Time Homebuyer Tips

What Is a Credit Score?

Before we dive into the specific credit score requirements, let’s briefly cover what this number means. In short, your credit score shows a lender how likely you are to pay a loan back on time. 

Companies use a formula called a scoring model to determine your credit score. They do so using your credit report, available through different credit reporting bureaus, including Equifax, Experian, and TransUnion.

There are many different factors that comprise a typical credit score. These include:

  • Your current amount of unpaid debt
  • Your bill-paying history
  • The number and types of loan accounts you have open
  • How long those accounts have been open
  • Your credit utilization ratio
  • New credit applications you’ve completed

Most credit scores will range from 300 to 850. Lending companies will reference your score to get a clearer picture of your financial responsibility. The higher your score, the more responsible you will appear.

In addition to a mortgage, you may also need your credit score to apply for:

  • An auto loan
  • A personal loan
  • A credit card
  • Another type of credit product

What Is a Good Credit Score to Buy a House?

Applying for home loans can be a daunting process. It can be even more challenging if your credit score isn’t where you’d like it to be. While this isn’t the only aspect of your financial history that a lender will look at, it’s an important one. 

First, rest assured that your score doesn’t need to be perfect. You can qualify for a loan even if you’re still working to build yours up. However, lenders will usually offer better terms and lower interest rates to applicants with higher scores.

This is because those applicants have a solid history of paying their bills on time, not carrying a ton of debt, and using the credit made available to them. In other words, they’re smart with their money and know how to manage it. This means they’re less likely to default on a loan and leave the lender shouldering the burden.

For most loan types (including a mortgage), lenders want to see a credit score of at least 620. However, if you can inch yours up just a little more, your odds of securing a favorable loan improve dramatically. 

If possible, it needs to be closer to 650, but don’t stop there. Applicants with credit scores in the high 700s are most likely to snag the lowest interest rates and best terms. 

Breakdowns by Loan Type

Different types of home loans will carry different credit score minimums. Here are some of the most common loan types and the number to aim for.

Conventional Home Loans: 620

Conventional home loans operate with a fixed interest rate, set over a defined time period. While a credit score of 620 can help you get in the door, it should ideally be closer to 700 or even 750.

This is especially the case if you are unable to put down at least 20% of the home’s price as a down payment. Buyers who cannot meet this requirement are required to pay private mortgage insurance (PMI). This is an additional premium added to your mortgage payment, designed to protect the lender if you stop making payments on the loan.

Buyers with a higher credit score will usually enjoy lower PMI rates than those with lower scores, which can help decrease your monthly costs.

VA Loans: 640

If your credit score is a little lower than 700, it’s smart to look into a loan secured by the U.S. Department of Veterans Affairs (VA). These loans do not have a minimum credit score requirement, but each VA lender will set its own terms.

To apply for a VA loan, you must fall into one of the following categories:

  • U.S. military veteran
  • Active duty U.S. military member
  • Eligible spouse of a military veteran or member

Most lenders require applicants to have scores in the mid-600s. 

USDA Loans: 640

Like VA loans, loans secured by the U.S. Department of Agriculture (USDA) do not have a minimum credit score requirement. However, lenders are more likely to approve your application if your score is at least 640.

If you can raise it even higher than that threshold, then you may be eligible for other perks offered on a USDA loan, such as streamlined credit processing. 

Applicants eyeing a USDA loan must meet certain requirements, including household income guidelines. You can learn more about those requirements on the USDA website.

FHA Loans: 500

Borrowers with lower credit scores around the 500s are usually unable to qualify for a conventional loan. However, they may be able to secure one insured by the Federal Housing Administration (FHA).

An FHA loan can usually come with a much lower down payment (around 3.5%), but your score will need to be closer to 600 to take advantage of that benefit. If yours is between 500 and 579, your down payment will be closer to 10%. 

Keep in mind that applying for an FHA loan isn’t a quick way to bypass more stringent loan requirements. Lenders will still want to analyze other aspects of your financial history to make sure that you’re a trustworthy applicant. This includes any open court orders.

If your score is around 500, your lender will likely require that all collections, judgments, and liens held against your accounts be paid off before your closing date.

Economic Factors to Understand

Calculating credit scores has always been one of the most important parts of a lender’s job. This has been the case since the FICO score debuted in 1989. The most widely used branded credit score, it’s the number that most lenders reference today.

However, the recent economic upheaval has placed even more emphasis on these three little numbers. Today, lenders must be absolutely certain that an applicant can keep up their end of the contract. 

As such, many are raising their minimum credit score requirements, even on mortgage products that traditionally offer a little more leniency. While you can qualify for certain types of home loans with a lower score, you’ll usually receive a higher rate. Your lender may also require you to make a larger down payment on your home to offset some of their financial responsibility. 

Tips to Raise Your Credit Score

If your credit score is a long way from 850, take heart. As long as your home purchase isn’t time-sensitive, you can put steps in place to raise it slowly and steadily. 

If you do need to complete the process quickly, then consider using a co-signer. This is someone you know and trust, who has a higher credit score than you do. If they are willing to put their name beside yours, then this can help you secure a better loan.

However, this can also be a risky partnership to get into, as the co-signer could be left shouldering the mortgage if you default for any reason. To avoid this consequence, it’s better to improve your credit score on your own. Here are a few ways you can do so:

  • Commit to paying all of your bills on time
  • Check your credit report for errors and report any that you find
  • Keep a low credit card balance (ideally no more than 30% of your available funds)
  • Keep current credit accounts open

You can also improve your score by diversifying your credit portfolio. This might mean applying for a new card or a credit-builder loan. However, make sure to do so sparingly, allowing at least six months to go by between new applications.  

Optimizing Your Credit as a Homebuyer

Before you begin applying for loans or talking to lenders, take the time to check your credit score. You’re entitled to one free report per year from each of the three reporting bureaus. If you don’t have a good credit score right now, work to improve it using the tips above. 

Along the way, we’re here to help you find your dream home. If you’re looking to put down roots in the Triangle, start with us. We can help you snag a spot in the best community, with a floor plan you adore.

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