If you want to make the switch from renting to owning a home, a good credit score can be essential for getting your foot in the door. While credit scores aren’t the only thing lenders consider for mortgage approval, they do carry a lot of weight. So, what is a good credit score to buy a house? The answer can depend on the type of home loan you’re applying for.
How important is credit score when buying a house?
Credit scores are one of the most important factors in buying a house, as lenders use them to gauge how likely you are to repay a home loan. Your credit score tells lenders how likely you are to repay them. The higher your credit score, the easier it can be to get approved for a mortgage, as well as help unlock lower interest rates on the loan.
So, does that mean it’s impossible to get a mortgage loan with a low credit score? Not necessarily. Some mortgage lenders will lend to borrowers with less than stellar credit; however, A lower score could limit your down payment options to qualify (i.e. you may need to make a bigger one), and your loan may come with a higher interest rate — making the cost of home ownership more expensive.
Minimum credit score needed for each mortgage loan type
For most mortgage types, the minimum credit score requirement is 620. This would put you in the “fair credit” range using the FICO score model. (FYI, a good credit score is 670 or higher, according to FICO.) But it’s possible to qualify with a credit score below that range, depending on the type of mortgage loan.
View a few different types of purchasing loans and their credit score criteria within the chart below:
|Type of Loan||Minimum FICO Score|
|FHA loan requiring 3.5% down payment||580|
|FHA loan requiring 10% down payment||500|
|VA loan||No minimum score. However, most lenders usually will require that your score be at least 620|
|USDA loan||No minimum score. However, most lenders usually will require that your score be at least 640|
Which home loan is right for you? Explore your options.
What changes your credit score?
The majority of lenders use FICO credit scores for mortgage loan approval decisions. These scores, developed by Fair Isaac, are calculated based on five specific factors:
- Payment history: 35% of your score
- Credit utilization: 30% of your score
- Credit age: 15% of your score
- Credit mix: 10% of your score
- Credit inquiries: 10% of your score
The information used to calculate your credit scores under the FICO model is drawn from your credit reports, which are maintained by the three major credit bureaus: Equifax, Experian and TransUnion. When the information in your credit report changes, your credit score can change. (Note: Banking history doesn’t directly affect your credit score, nor does your employment history, race, age or gender.)
Let’s say, for example, you charged a $2,500 purchase to your credit card, increasing your credit utilization for that card to 75% of your credit limit. Two months later, you pay the balance off in full, reducing the card’s credit utilization to 0%. Assuming everything else remains the same, it’s likely your credit score would go up since you’re using less of your total credit limit.
Credit scores can go the other way, however. Forget to pay your credit card bill on time, for instance, and your score could drop since payment history is the most important credit scoring factor. Applying for multiple loans or credit cards within a short period of time can also cost you points if a new hard inquiry shows up on your credit report each time.
How to improve your credit score?
You can building and maintain a good credit score by developing the right financial habits, including:
- Pay bills on time.
- Maintain low balances on your credit cards (to improve credit utilization)
- Increase your credit limits on your cards without increasing your balance (again, this can help to improve credit utilization)
- Use different types of credit, such as loans and credit cards
- Keep older credit accounts open
- Pay off collection accounts
- Limit how often you apply for new credit, especially if you’re planning to apply for a mortgage loan in the near future
Keep in mind: Improving your credit score doesn’t happen overnight. It can take time for your efforts to be reflected on your credit report and subsequently, in your score.
What else do mortgage lenders consider?
Credit scores are important in the mortgage process, but lenders look at your full financial picture when deciding whether to approve you for a home loan. They also take a look at these factors:
- Income and employment status
- Outstanding debts
- Assets, including bank accounts and investment accounts
- Financial obligations other than monthly bills, such as alimony or child support payments you’re required to make
- Delinquencies, bankruptcies and foreclosures
Lenders want reassurance you’ll be able to keep up with your monthly mortgage payments and repay your loan on time. They’ll consider your debt-to-income ratio or DTI, which reflects the percentage of your income that goes to debt repayment each month. The less of your income that’s earmarked for debt repayment, the better.
Mortgage lenders also analyze the loan terms and the size of your down payment. A larger down payment, for instance, could help you to qualify for a lower interest rate as the loan becomes less risky for the lender. Increasing your down payment can have another positive side effect if it allows you to avoid paying private mortgage insurance (PMI). Opting for a shorter loan term could also help you to get a lower rate.
Your home loan options if you have poor credit
Less than perfect credit? It’s still possible to qualify for a mortgage loan. To start, you will need to know the mortgage options you might qualify for.
An FHA loan, for example, could be a good choice as it’s possible to get approved with a FICO score as low as 500. Or if you’re an eligible veteran, you might also consider a VA loan, since there are no minimum credit score requirements.
If you’re still having trouble getting a home loan with poor credit, you may need to delay your purchase and spend some time working on your credit score instead. This can mean a delay in achieving your home ownership dream — but it could help you to get a mortgage loan with better terms in the long run.
Your credit score counts
Credit scores are a measure of financial health, and it’s important to understand what credit score is needed to qualify for a mortgage loan. While it’s possible to qualify for a conventional loan with a minimum 620 credit score, individual mortgage lenders may set the bar higher. The higher your score is, the better your loan terms could be. But even if your credit score isn’t ideal, you could still have some mortgage loan options to choose from.
Ally Home simplifies the homebuying process.