If you’re looking to purchase residential property, it’s crucial to know what credit score is needed to buy a house. There’s no need to become unnecessarily stressed; lenders aren’t always looking out for perfection when reviewing your credit scores.
However, an impeccable credit score is a considerable asset because it shows your ability to pay debts on time. A higher credit score can translate to flexible home loan terms and lower interest rates.
In most cases, a 620 credit score will help you secure a home loan. That’s the bare minimum: a high score enhances your chances of getting approval and lower interest rates. Aim for a score of around 700 and above.
Note that each lender has the freedom to dictate their credit score standards. Moreover, the loan type you intend to apply for will determine the score you need. Familiarize yourself with the minimum and highest credit scores required to purchase a house.
Without further ado, let’s find out the minimum credit score home buyers need and how you can be more creditworthy.
Home Loan Types and Their Minimum Credit Scores
Mortgage brokers determine the minimum credit score you need based on your desired type of mortgage. This means scores vary, and borrowers cannot get approval for loans if they have bad credit.
Here are the most sought-after home loans and their credit score requirements:
1. Conventional Loans
Conventional loans are backed by Freddie Mac or Fannie Mae.
While it’s possible to get a conventional mortgage with a low score of 620, maintaining a FICO score of between 660 and 679 is ideal. This increases your chances of obtaining a low-interest mortgage rate.
According to Experian, home buyers with an average credit score of 660 to 679 qualify for a low rate of approximately 3.168% on their loan interest. Borrowers with excellent scores ranging from 760 to 850 are likely to secure mortgage loans with a rate as low as 2.55%.
When you have high credit scores, your private insurance mortgage (PMI) premium rates reduce significantly. It’s worth noting that lenders will likely ask for a PMI if you put a down payment of less than the required 20% of the conventional mortgage. Just like with interest rates, the PMI charged by lenders varies depending on the borrower’s credit score.
A higher score guarantees a low premium mortgage insurance, while low credit scores translate to high costs. A report by Ginnie Mae, the Urban Institute, and Genworth Mortgage Insurance states potential homeowners should expect to pay a PMI rate of 0.58% to 1.86% for conventional property loans.
2. FHA Loan
A 500 FICO score sounds too low, but it might help you obtain an FHA mortgage quickly. These mortgages created by the Federal Housing Administration are inclusive. Because FHA loans have less stringent down payment terms, they make homeownership attainable for first-time homeowners with scores between 500 and 580.
Another incredible feature of FHA loans is that your credit score doesn’t determine your interest rate. Generally, you don’t need a credit score to get a loan insured by the Federal Housing Administration. However, many mortgage lending institutions require a FICO credit score of 580 to approve your loan application.
Other FHA mortgage approval requirements are:
a down payment of at least 3.5%
long-term loans, preferably 15 years and above
3. USDA Loans
Insured by the department of agriculture, USDA mortgages are suitable for purchasing homes in small towns and rural areas. In short, this loan program eases the process of homeownership for individuals earning low to medium-income by providing affordable financing.
At the very least, property buyers in the residential real estate market should have a 640 score to qualify for USDA loans. While you can be eligible for financing with a score of less than 640, there are several requirements for qualifying for these mortgages when your score is below the required minimum.
First, your home loan must undergo a manual underwriting done by the US Department of Agriculture. Some certified lenders expect borrowers to reduce their risk with a savings account holding a considerable amount of cash, a low debt-to-income ratio, steady employment history, and monthly income.
4. VA Home Loans
Although the U.S. Department of Veterans Affairs doesn’t dictate a minimum credit score for VA home loan eligibility, individual lenders might. Individual lenders tend to look for a credit score range between 580 to 620. The Veteran Affairs (VA) mortgage program is a perfect fit for borrowers who meet the set requirements.
Those eligible for getting a VA mortgage include:
Members or retired military, national guard, or military reserve personnel.
Spouse of military staff who lost their lives while serving or due to work-related disability.
The most amazing thing about the Veteran Affairs mortgage program is that you can finance 100% of your home purchase. Unlike conventional mortgages, you don’t have to worry about paying for private mortgage insurance.
There’s a catch, though — Veterans applying for VA loans should be able to pay a funding fee of about 2.3% of the mortgage. If you give a10% deposit for your house, the funding fee rate is 1.4%. For applicants who get a disability rating, the funding fee is zero.
What You Should Know About Your Credit Score
To understand your credit qualifying score, you need to review your credit report. This report shows your credit history. As such, the slightest error on it can negatively impact your score.
Request a credit report from any of the three major credit-reporting firms. Evaluate your report carefully and report mistakes immediately when you spot them. Take advantage of the fact you’re eligible for a free report from all three credit reporting agencies every year to stay on top of your FICO score.
When you have clear details about your score, weighing your loan options becomes easy. You’re able to determine if you should apply for conventional mortgages or government-backed loans like the USDA, VA, and FHA home loans.
Difference Between Credit Score and FICO Score
If you’re like many property buyers, you’re probably thinking the FICO score and credit score are the same thing. While you’re not wrong, these two terms aren’t exactly synonymous.
Ideally, a credit score is a general report of your credit history analyzed automatically by computers to calculate your score. FICO score is a scoring method that assists lenders in determining the creditworthiness of loan applicants. The typical range of FICO scores is 300 to 850. Maintaining a higher score translates to excellent credit.
Lenders take into consideration various factors when using the FICO scoring model.
Scoring methods differ from lender to lender, but there are standard variations of FICO lenders use as a base. FICO evaluates various variables from your credit reports as per guidelines from the three major credit bureaus (Experian, TransUnion, and Equifax).
The following aspects help lenders calculate your score:
debt-to-income ratio (includes student loans, car payments, etc.)
If you want to get approval for a home loan and your score is bad, there are effective steps you can take to improve your credit score.
1. Reduce Recurring Credit Balances
Paying off revolving debt is an excellent way to ensure your credit utilization rate remains low, thus improving your overall credit score. Therefore, make it a habit to pay your debts every month. If you have extra cash, consider paying more than the minimum credit card balances set by creditors.
2. Avoid Applying for New Credit Accounts Regularly
Applying for new credit accounts or cards is a sure way of increasing your credit limit. This approach, however, can have a negative impact on your score if you open several accounts all at once. As a general rule of thumb, open new lines of credit sparingly.
3. Pay Off Old Debt
You need to be cautious when paying off old debts to maintain high scores. Typically, creditors mark debt they don’t believe the borrower will pay as “charged-off.”
If you decide to settle an old debt by any chance, you risk lowering your score. That’s because payments made on charged-off accounts reactivate the debt as new.
4. Avoid Canceling Unused Credit Cards
Closing credit card accounts you don’t use anymore might seem like an excellent move to strengthen your score, but it isn’t. Your credit history is essential, and the longer it is, the more chances you have to obtain a home loan. If you want to close unused credit accounts, close those you opened recently.
5. Stay on Top of Your Credit Report
Requesting your credit report from the three credit reporting agencies doesn’t hurt your score. Get copies of your report and review them carefully to spot mistakes.
Make sure to dispute any errors, such as misspelled addresses, names, and accounts that don’t belong to you. Doing so is one of the best ways to boost a lower credit score.
Factors Lenders Consider When You’re Purchasing a Home
Credit scores are not the only elements that determine your home loan approval.
Lenders consider other aspects listed below:
Every mortgage lender wants to be sure you will pay your monthly mortgage payment on time. For this reason, potential lenders will review your monthly income report before approving your application.
Aside from income, mortgage providers also want to know the amount of debt you have every month. They will factor in all your debts, including your monthly payment for your mortgage. Your total monthly debt should be at least 43%. Having a high debt-to-income ratio reduces your chances of qualifying.
The amount you have in your savings account will play a critical role in determining your loan amount and rate. Home loan providers want to ensure borrowers have enough savings to pay off their mortgage even when income streams dry up.
In most cases, mortgage lenders consider applicants with savings that can cover mortgage repayment for at least two months.
Loan Deposit or Down Payment
Mortgage brokers believe loan applicants who pay large down payments are less likely to default on their mortgage. This means if you pay more than the required 20% down payment of the mortgage, lenders will approve your application quickly. You’ll also qualify for low-interest rates and fees.
Experts in Personal Finance
While the minimum credit score to buy a home will vary depending on the type of loan you want, lenders will approve your loan quickly, set flexible terms, and offer low-interest rates and fees if you have a higher score.
Even with a low score, homeownership doesn’t need to be impossible. Working with a lender like Vaster can help buyers find a loan they can qualify for or work towards qualifying for.