When beginning the home buying process, particularly for the first time, you might be worried about having the minimum credit score to buy a house. While you might believe you have a bad credit score, what is important is what the lender thinks when you apply.
Many potential home buyers ask real estate agents or mortgage brokers what credit score is needed to buy a house.
Typically, the loan type you choose will decide what the lowest credit score to buy a home actually is. On top of this, specific lenders will have their own minimum score requirements.
Let's take a look at the lowest credit score needed to buy a home and the things you can do to improve your situation.
What Is The Minimum Credit Score to Buy a House?
The credit score scale runs from 350 to 850, and where you fall within this range will decide how easy it is for you to qualify for different mortgage types.
One of the best tips when getting a mortgage is to work on improving your credit score. Doing so will significantly impact what you actually pay for a home.
Conventional Loans
Often considered the default type of mortgage, the credit score needed to buy with a conventional home loan is 620. Conventional mortgages are the most popular type of mortgage product.
FHA Loans
Created by the Federal Housing Administration to make homeownership possible for more people, they don't have minimum score requirements. Typically though, if you don't have a credit score of at least 580, you're not going to qualify for this type of mortgage.
You will need to have 3.5% of the purchase price for a down payment, and the mortgage has to be for at least 15 years.
If you're considering purchasing a fixer-upper and are considering an FHA 203k rehab loan, the credit score needed to get a mortgage will be the same as a standard FHA loan.
VA Loans
Created by the Department of Veteran Affairs, this loan type offers an affordable way for active-duty military personnel or veterans to buy a home. A credit score of 580 will be needed for this mortgage type.
Typically, VA loans offer some of the lowest interest rates thanks to the Federal government's guarantee.
VA loans don't need a down payment so that you can finance the entire cost of the home. You will need to have a certificate of eligibility to show the lender you qualify.
USDA Loans
If you are looking to buy a home in a more rural area, a credit score of 620 is needed for this government-backed mortgage. Even if you are looking to buy a home in a suburb, you could find this type of mortgage is available to you.
You won't need to worry about finding a down payment with a USDA loan, and interest rates are typically lower than conventional mortgages. Even if you don't reach the 620 minimum, sometimes exceptions can be made.
Please speak to the loan officer beforehand to see how lenient the lender is with their credit score requirements.
Jumbo Loans
If you require a larger mortgage than the local mortgage limits, a jumbo loan requires a minimum credit score of 680. They often benefit from lower interest rates, though they can need a larger down payment, sometimes up to 25%.
Jumbo loans are much more challenging to get when you have a marginal credit score. The rest of your finances will need to be top-notch.
What Affects Your Credit Score?
The credit score system is designed to help lenders understand how much of a risk you will be as a borrower. The FICO score calculates your risk using five main factors:
- Payment history
- Credit usage
- Length of credit
- Credit types
- New credit applications
Your payment history is the most important of these, making up 35% of your score. How much credit you use of the available you have, comes in a close second at 30%.
How long you have had credit accounts open is also essential providing 15% of the score. A different mix of credit types accounts for 10% of the score, as does any newly opened lines of credit.
Having a good credit score can pay some serious dividends when you consider the impact on your mortgage payments.
A credit score isn't the only thing lenders look at when deciding to approve your mortgage application. They also consider how much debt you have compared to your income, how good you are at managing that debt, and other things like bankruptcy in your history.
While you might not be able to do anything about your past, your credit score is something you have more control over.
If you have a lower credit score, you're liable to face higher interest rates. Your credit score is an important factor in your mortgage application, but there are things you can do to improve it.
It should be noted that lenders will also look at your credit score even more carefully when you're looking for a loan for land to custom build a home.
How to Boost Your Credit Score
Some simple steps you can take to improve your credit score:
- Make sure you pay your bills on time.
- Reduce your credit usage by increasing your payments to pay down the debt or increasing your credit limit.
- Keep old credit accounts open; this helps with your credit utilization and increases the average age of your credit accounts.
- Don't apply for new credit; new applications will temporarily hurt your credit score.
When you take these steps, you can't expect your score to improve overnight, and it could take months to see results. It is undoubtedly worth taking these steps even if improvements don't seem too great because even minor improvements in your score can save you thousands on the mortgage.
Final Thoughts
Understanding the minimum credit score needed to purchase a credit score is essential. It will give you something to strive for as a prospective home buyer.
Starting early to work on your credit score and overall financial situation will pay significant dividends down the road.
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