When you’re preparing to start house-hunting, be sure you’re financially ready to close on the home of your dreams. Start with your creditworthiness. What is a good credit score to buy a new house in 2024?
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 the score, the more creditworthy you appear to lenders, and the easier it can be to secure a loan. Did you know that your credit score can help determine the interest rate of your loan, too?
So, what is a good credit score? And how can you improve yours to get it where it needs to be for the loan you want? Take time right now to better understand credit score, how they impact your homebuying experience, and what you can do to maximize your score.
What is a credit score?
Your credit score is a number that shows a lender how likely you are to pay back a loan on time. The score ranges from 350 to 800. The higher the score, the better your borrowing potential.
The score is determined by a credit bureau, which is a company that collects and analyzes credit information, including loan amounts, payment history, debt and available credit. Experian, Equifax, and Transunion are the three main credit bureaus. Lenders may rely on one, two, or all three companies to gather their data for making loan decisions. Credit bureaus are regulated by the Fair Credit Reporting Act, which governs the data that they are allowed to collect and share.
Your credit score may vary from one credit bureau to the next, because of the data they collect and how they weigh it to determine your score. In addition, credit reports sometimes contain errors. It’s important to check all three.
But WAIT! Before you rush off to check your credit score, be advised that any inquiry could negatively impact your score. Credit bureaus do not necessarily differentiate inquiries as coming from the consumer or a lender. They might view them as another loan request, which could lower your credit score. However, you can get a free credit report without hurting your credit score, once a year, at FreeCreditReport.
How is my credit score calculated?
Companies use a formula called a scoring model to determine your credit score. 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, which is how much of your credit you’re currently using
- Loan inquiries, which are new credit applications you’ve completed that have initiated a lender contacting a credit bureau
In addition to securing a mortgage, you may also need a good credit score when you 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 home loan even if you’re still working to build up your credit score. However, lenders will usually offer better terms and interest rates to applicants with higher scores.
This is because they look for applicants who demonstrate a solid history of paying their bills on time, not carrying a ton of debt, and responsibly using the credit made available to them. In other words, these consumers are smart with their money and know how to manage it. These traits show that the customer is 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 a little higher than that, your odds of securing a favorable loan improve dramatically.
What is a good credit score to buy a house in 2024? If possible, it should be close 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 for a home loan.
Credit score requirements by home 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 are guaranteed through a private sector lender and not insured by a government agency, like the Federal Housing Administration (FHA), US Department of Veterans Affairs (VA), or US Department of Agriculture (USDA). Conventional home loans operate with a fixed interest rate, set over a defined time period—most commonly, 15 or 30 years. While a credit score of 620 can help you get in the door for loan approval, you’ll get a better interest rate if your score is closer to 700 or even 750.
You should also have a debt-to-income ratio of 43%, meaning the total amount of the debt you’re carrying equates to no more than 43% of your total income.
You may need as little as 3% down payment for a conventional loan. Bear in mind that if you are unable to put down at least 20% of the home’s price as a down payment, you will be 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 to the loan.
Buyers with a higher credit score will usually enjoy lower PMI rates than those with lower scores, which can decrease your monthly costs.
VA Loans: No minimum
A home loan secured by the US Department of Veterans Affairs (VA) does not have a minimum credit score requirement; each VA lender will set its own terms. They frequently look for a minimum 600 score.
A VA home loan offers a low interest rate to qualified borrowers, as well as little or no down payment!
To apply for a VA loan, you must fall into one of the following categories:
- US military veteran
- Active duty US military member
- Eligible spouse of a military veteran or member
Thank you for your service!
FHA Loans: 500
Borrowers with credit scores around the 500s are usually unable to qualify for a conventional home loan. However, they may be able to secure one insured by the Federal Housing Administration (FHA), which is available through FHA-approved lenders.
An FHA loan can usually come with a much lower down payment (around 3.5%), but your score will need to be at least 580 to take advantage of that benefit. If yours is between 500 and 579, your minimum down payment will probably be 10%. Your debt-to-income rate shouldn’t exceed 43% to qualify for an FHA home loan.
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 must be paid off before your closing date.
USDA Loans: No minimum
US Department of Agriculture (USDA) loans are available for purchasing homes in rural areas for low- to moderate- income homebuyers who are planning to use the home as their primary residence (i.e., not vacation, rental, or investment property). The loan may cover up to 100% of the required amount to buy the home, so you might not have to come up with a down payment if you qualify for a USDA home loan.
Although there is no stated minimum credit score by the USDA, approved lenders must consider your creditworthiness for such a desirable loan. USDA-approved lenders are more likely to approve your application if your score is at least 640 and you have no more than a 41% debt-to-income ratio. Applicants eyeing a USDA loan must meet certain requirements, including household income guidelines.
If you can raise your credit score even higher than that threshold, you may be eligible for other perks offered on a USDA loan, such as streamlined credit processing.
Tips to raise your credit score
If your crest score is a long way from 800, take heart. As long as your home purchase isn’t time-sensitive, you can put steps in place to steadily raise that number.
If you do need to complete the process quickly, then consider using a co-signer to the loan. 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, you might secure a better loan.
The debt you’re incurring together will show up on their credit report as well, an important consideration for a co-signer. In addition, this can be a risky partnership for a co-signer, who could be left shouldering the mortgage if you default for any reason.
To avoid this consequence, it’s better to improve your credit score and qualify on your own for the home loan. Here are a few ways you can achieve this goal:
Commit to paying all of your bills on time. Late payments hurt your score. Your payment history accounts for as much as 35% of your total credit score.
Do not open new credit card accounts. Just the act of applying causes the lender to pull your credit report (known as a “hard inquiry”), which alone can lower your score by as much as 10 points.
Check your credit report for errors and report any that you find.
Keep a low credit card balance; ideally, use no more than 30% of your available funds.
Keep current credit accounts open, even if you’re not using them. Having unused credit is a plus!
Related article: Best Ways to Save for a Home Down Payment
Get pre-approved
Mortgage pre-approval is an important step in the homebuying process. With one phone call, you can determine if you qualify for a home loan and how much you can likely borrow. It’s not a guarantee that you’ll be approved for the mortgage, but pre-approval is a good sign that you’re ready to buy.
Here’s what you’ll need to provide to the lender when requesting a mortgage pre-approval:
W2 statements from the last 2 years
- Pay stubs from the last 3 to 6 months
- Bank statements
- Driver’s license
- Social security number or individual taxpayer identification number
- Tax returns
Once you’ve confirmed your mortgage pre-approval, you’ll receive a letter from the lender. Include this letter with any offer you present for the purchase of a home because it shows you are a serious buyer.
Buy the right home with your credit
Now that you’ve learned what is a good credit score to buy a new house in 2024, you can shop with confidence.
If your search brings you to Raleigh, NC, New Home Inc. wants to be part of your homebuying journey. We build new construction homes—townhomes and single-family homes—in cities and towns near Raleigh, including Lillington, Fuquay-Varina, Smithfield, and Willow Spring. Our communities offer a variety of character, from a neighborhood of just 16 homes to as many as 174. You’ll find large homesites that range from 0.5 to more than 2 acres. Live close to town or venture out a few miles farther. We’ve chosen locations with easy access to the main roads that lead you back and forth to Raleigh, Fayetteville, and other sought-after destinations.
Using our “Future-Proof” approach to home design, we’ve looked at what’s been missing in new homes that could make them more secure, safe, convenient, and comfortable. New Home Inc. includes more features in our homes, so you gain value. Look at these innovations:
- The Smart Door Delivery Center is the solution for safely receiving home deliveries. The fully enclosed, climate-controlled space sits between your exterior and interior front doors. The delivery person receives a code to authorize entry only to the delivery space. The door automatically locks afterward, keeping your packages protected.
- Our standard for the kitchen island is an oversized one, with seating on 3 sides that gives you more seating.
- The “messy kitchen” service pantry adds a serving, storage, and clean-up space beyond your kitchen, reducing the clutter and traffic.
- The drop zone by the garage entry to your home is outfitted with a cubby storage space to help you organize the clutter.
- Our smart home automation package, also included, adds the convenience, security, and energy efficiency of the latest technology.
- We follow the requirements of the ecoSelect Home Efficiency Program, so our homes are independently certified to adhere to the high standards. This higher level of energy efficiency saves you money on utility bills, month after month.
- New Home Inc. includes an electric vehicle charging station rough-in. All the work behind the walls is done, so when you’re ready to finish installing the charging station, it’s quick and easy!
- Our homes are wired with CAT6 cabling, delivering the most robust, reliable network throughout your home—with NO dead zones!
It’s a great time to buy a new home, whether you buy or build. New Home Inc. has quick move-in homes in our communities, ready and waiting for you. If your credit score has you prepared to buy right away, contact us to schedule a visit and tour the new construction. Or browse the available homesites and floor plans so we can build your new home exactly to your wishes!
