The moment you start thinking about buying a house, you should check your credit score. This number that sums up your debt history can be the factor that makes or breaks your eligibility to secure a mortgage. This leads to the question: what credit score do I need to buy a house?
There are a few answers to that question, depending on your lifestyle and location. Here's what you need to know about securing a mortgage based on your credit score.
Understanding Your Credit Score
First, it's helpful to understand what factors impact a credit score and how to know if yours is good. Your credit score is influenced by many factors, including how much money you've borrowed, the number of loan inquiries you've approved, whether you pay your bills on time, etc.
These factors are weighted and presented in a range that basically indicates whether you are a responsible borrower. The range is as follows:
300-579: Poor
580-669: Fair
670-739: Good
740-799: Very good
800-850: Exceptional
It's important to note that if you've never owned a credit card or have no bills in your name, you may not have a credit score, period. This can be even more challenging than trying to secure a mortgage with a fair credit score.
What Credit Score Do I Need to Get a Mortgage?
Most lenders want to see a minimum "good" credit score before approving financing for a home. The better your credit score, the better mortgaging opportunities you will have. For example, if you have a credit score of 825, you may be eligible for a significantly lower down payment or interest rate.
Here are some of the most common types of mortgages and what credit scores are needed to be approved for them.
Conventional Mortgage
A conventional mortgage is a standard loan option offered by banks and approved lenders. While these mortgages are ultimately overseen by government regulations, they are not offered by government organizations like others on the list.
To secure a conventional mortgage, you need a minimum credit score of 640, though some banks are recommending a credit score of 740 to secure a lower interest rate in the post-pandemic world. Additionally, borrowers are required to have a minimum of 5% down payment on their home.
FHA Loan
The FHA offers a mortgage solution to those with lower scores. To be eligible for an FHA mortgage, you must have two years of proven, consistent employment and a credit score of over 500 with a 10% down payment and mortgage insurance. If you have a credit score of over 580, only a 3.5% down payment is required.
USDA Loan
USDA loans are for low-income families in rural areas who fit the list of requirements. Lenders prefer a 640 credit score with no down payment. Buyers are still responsible for mortgage insurance and closing costs.
VA Loan
VA loans are for active service members and veterans. The preferred credit score is 620, though there are other options to be eligible. Like the USDA loan, no down payment is required for a VA mortgage.
Tips for Improving Credit Score
Regardless of which option you're eligible for, improving your credit score can save you thousands of dollars in interest over the years. Start monitoring your credit score immediately to check for negative items. When appropriate, file disputes to remove collections from your credit report and ensure everything is accurate and up-to-date.
If you have outstanding debts, focus on creating a payment plan to pay them down before taking on a mortgage. Not only will this put you in a better financial situation, but it will also improve your debt ratio and credit score.
Author Bio: Andrew is an NY-based writer who covers DIY home projects, cleaning, and organization. When not writing, he spends his time with his two rescue dogs, Jet and Rocket.
