What Credit Score Do I Need to Buy a House?

In Financing Your Home Purchase, by Anthony Bayardelle

Here is a quick guide to how your credit score affects your ability to buy a house, your interest rate, and even your down payment.

Considering buying a house? Knowing your credit score is an essential first step to figuring out what homes you can afford! Here are ways to check your score, what score you'll likely need, and some ways to get a loan even if your credit score needs work.

Credit Score Basics

A credit score is a number (usually between 300 and 850) that describes how much of a “risk” it would be to lend you money.

A credit score in the 800’s represents someone with a long history of good credit, someone with multiple credit accounts who makes all their payments regularly and on time, and someone who has a great deal more credit than they regularly use (e.g. they don’t max out their credit cards).

A person’s credit score can get lowered for many reasons, including making payments late, using too high of a percentage of your available credit, not having a long enough credit history (i.e. your accounts are too recent), having debt, bankruptcies, or collections, or having too many “hard inquiries” on your credit score.

MYTH: Checking your own credit lowers your credit score.

FACT: Checking your own credit is referred to as a “soft inquiry” and does not affect your credit score. Only credit checks that are run when you apply for something (like a mortgage, loan, or credit card) count against your credit score.

Credit Scores and Mortgages

While there’s no one “right” number you have to beat in order to get a good mortgage, there’s lots of conventional wisdom out there. What follows is a roundup of the advice from different, well-respected financial websites.

Credit Sesame

When Credit Sesame did a survey of their 140,000 members and found that they fell into three categories: those who had conventional mortgages, those who had FHA mortgages, and those who did not have a mortgage. When they looked at the credit scores for these three categories, they found the following averages:

Conventional Mortgages (average credit score of 682)
FHA Loans (average credit score of 649)
Those Without a Mortgage or FHA Loan (average credit score of 613)

Lending Tree

The website for the Lending Tree adds VA loans and USDA loans to the mix, reporting the following minimum credit scores:

Conventional Mortgages (at least 620)
USDA Loans (at least 580)
FHA Loans (at least 500)
VA Loans (no minimum, but your whole loan profile is reviewed)

The Lenders Network

When The Lenders Network discussed the issue of credit scores, they included a much broader range of different loans you could get. They described the average credit scores for the following types of loans:

FHA Loan (need a credit score over 580 for a 3.5% down payment, over 500 for 10%)
VA Loan (need a credit score over 620, with some lenders only requiring 580)
FHA 203K Loan (need a credit score over 620)
Conventional Loan (need a credit score over 620)
USDA Loan (need a credit score over 640)

Credit.com

In an article on credit scores and mortgages, Credit.com confirms that an FHA loan usually requires a 580 or higher, while a conventional mortgage usually requires at least a 620. They also add that credit lenders are usually looking for an optimal score of 740, calling a 680 an “unofficial minimum”

Bank Rate

Instead of talking about credit rates per loan type, BankRate.com examined the average interest rate people were able to get on a 30-year, fixed-rate mortgage, based on their credit score. Those with scores over 760 had an average interest rate of 3.64%, while those below 620 had an average interest rate of 5.23%. You can see the whole chart here if you’re curious about the specific breakdowns in between.

FHA.com

Another factor that is influenced by your credit score is your down payment amount. On FHA.com, they mention that a credit score above 580 qualifies for only a 3.5% down payment, while those below 580 have to make a more significant 10% down payment.

What to Do If You Have Low Credit

If your credit score is currently low, don’t give up hope just yet! There are also many factors that can help compensate for bad credit and help you still acquire a loan.

Here’s a list of some of the things that can help you get a loan even with low credit:

Making a higher down payment (over 10% of the home value)
Having been with your current employer for a long time (demonstrates stability)
Having a high, regular income
Having a low ratio of debt to income
Having a high balance in your savings account
Having a good explanation for your low credit (showing it was caused by a specific event and showing how you have recovered since this event occurred)

How to Improve Your Credit

Despite the possible ways to get a loan even with low credit, it’s still going to be in your best interests to raise your credit score as quickly as possible. Here’s a quick list of the best ways to raise your credit score as fast as possible.

Pay off your credit cards
The amount of your credit currently in use is 30% of your total credit score, so an improvement here will have a rapid effect on your score. You should especially focus on paying off any credit card debt that has been carried for more than one payment period, as that will have an even more significant impact on your credit score. Usually lenders like to see you using 35% or less of your available credit, with those of the highest credit scores using 6% or less.
Make all your payments on time
This one should be high on your priority list. Your history of payment is behind 35% of your credit score, with late payments staying on your credit report for seven years. (They do get less important to your score before the seven year period ends, but they still have some effect.)
Leverage being an “Authorized User”
While you may not be able to start a new credit card account of your own, if a family member is able to add you as an “authorized user” to their credit card account, the entire history of that account will immediately become part of your credit report.
Ask collection agencies for a “Pay for Delete”
If you have collections on your credit history, you can ask the collection agencies if they will execute a “pay for delete”. This means that they remove the account completely from your credit report in exchange for you paying the balance of the account.
Don’t apply for too many big purchases
Getting things like car loans, student loans, or mortgages can impact your credit score. This can make up to a 10% in your total credit score, so try to limit the number of big purchases you make at once.

The Overall Summary

The exact “recommended” credit score depends on the type of loan you’re applying for, the amount you want to use for a down payment, and the interest rate you hope to get. Overall, few loans are available if your credit score is under 500, conventional mortgages often use a minimum of 620, and the “optimal” credit score is 740 or above.

However, don’t despair if your credit score isn’t what it needs to be, because there are ways to improve it. Start making moves to improve your credit right away, but take note of the steps given for what to do if you have low credit in the meantime.

Finally, talk to your realtor or get in touch with a qualified lender to get to know the options for your specific situation.

If you want to see what type of loan you could get with your current credit score, you can schedule a free, confidential 15-minute consultation call with me to go over your options.