Your credit scores play an important role in helping you to achieve many financial milestones, and buying a home is no exception.
When you apply for a mortgage, lenders use your credit scores, among other factors, to decide whether to approve you for a mortgage. Your scores can also help determine your mortgage rate.
So what is a good credit score to buy a house? In general, lenders look for credit scores of at least 620 to qualify borrowers for common mortgages. We’ll break down some of the requirements for different mortgage types and what else you need to know about qualifying for a mortgage.
- What credit scores do you need to buy a house?
- What do lenders consider besides credit scores?
- Can I buy a home with bad credit?
- What factors make up your credit scores?
- How can you improve your credit scores?
What credit scores do you need to buy a house?
While there’s no single credit score that will qualify you for a mortgage, there’s a standard range of scores for the different types of home loans. And each lender can set its own standards. Just because your credit scores are sufficient to qualify for a mortgage on paper doesn’t mean they’re enough to qualify with the lender of your choice.
A conventional loan is one that isn’t a part of a mortgage loan program through the federal government. Conventional loans can be either conforming or nonconforming. A conforming loan is one that meets standards set by Fannie Mae and Freddie Mac, which are companies chartered by the U.S. government to provide affordable mortgage financing to borrowers. A nonconforming loan doesn’t need to meet those standards.
Fannie Mae requires that homebuyers have credit scores of at least 620 (fixed-rate mortgages) or 640 (adjustable-rate loans) to qualify for a conforming loan. While it may be possible to qualify for a nonconforming loan with scores less than 620, only a small percentage of homebuyers have credit scores lower than that, and those loans tend to have higher interest rates.
FHA loans, which are guaranteed by the Federal Housing Administration, provide an opportunity for people with lower credit scores to buy homes. The FHA Lender’s Handbook says the minimum score to borrow an FHA loan is 500, but you’ll need a down payment of at least10%. To qualify for the lowest down payment of 3.5% with an FHA loan, you’ll need a credit score of at least 580. Additional lender requirements may also apply.
A VA loan is guaranteed by the Department of Veterans Affairs. VA loans are available to military veterans and uniformed service members who have met certain service requirements. The VA loan program doesn’t have a minimum credit score requirement. Instead, lenders set their own minimum score requirements. That being said, lenders often require credit scores of 620 or higher for these loans.
USDA loans are available for low- to moderate-income households living in rural areas. There are two loan programs under the USDA. In one, the U.S. Department of Agriculture guarantees loans provided by approved lenders. In the other, the USDA lends the money directly. There are no USDA-established minimum credit scores required to borrow, but there are income eligibility rules. It’s possible to earn too much money to qualify for a USDA mortgage.
What do lenders consider besides credit scores?
Your credit scores are important, but they’re not the only factor that lenders consider when you apply for a mortgage. There are several other things lenders will look at when deciding whether to approve you for a mortgage, how much you may be able to borrow, and what your potential interest rate will be.
Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt. For conventional loans, some lenders may require that your DTI be no higher than 36%, but may go up to 45% for borrowers who meet other credit score and cash reserve requirements.
And you may find that some lenders have a different tolerance for debt ratios. The Consumer Financial Protection Bureau reports that it’s even possible to get a qualified mortgage (what the CFPB describes as a “more stable” and affordable mortgage loan) with a debt-to-income ratio higher than 43%.
The down payment you need depends on the type of loan and your other financial factors. For VA and USDA loans, you can buy a home with as little as 0% down. For conventional mortgages, your down payment may be as low as 3% for certain types of loan programs. In general, you’ll need a down payment of at least 20% on conventional mortgages if you want to avoid private mortgage insurance.
Lenders want to make sure you have savings in place when you buy a home so you can properly maintain the house and continue making your payments if there’s a disruption to your income. Acceptable cash reserves can include money in your checking or savings account, the value of other financial investments like stocks and bonds, the amount vested in your retirement account and the cash value of a vested life insurance policy.
The amount of cash reserves you’ll need to qualify for a mortgage will depend on multiple factors, including your DTI and the down payment you’re able to provide.
When you buy a home, lenders want to know you’ll have a source of reliable income to make your loan payments. Lenders prefer that you have at least two years of employment income, though they can approve someone with just one year of employment if they have reason to believe your income is stable.
In the case of self-employed individuals, you’ll usually need to prove two years of earnings. But lenders can make an exception for borrowers with at least one year of self-employment income who previously worked in a similar field and who have maintained a stable or increasing income.
Can I buy a home with bad credit?
Lower credit scores may not stop you from buying a home, but there are likely other hurdles you’ll have to overcome to make it happen.
First, borrowers with lower scores generally end up with higher interest rates, which can cost you big over the course of your loan. In fact, the difference of just a single percentage point in your interest rate can mean the difference of thousands of dollars in interest over the lifetime of the loan.
Another consequence of lower credit scores could be that your lender requires a larger down payment. For example, an FHA loan allows borrowers to get a loan for as little as 3.5% down — as long as they have a credit score of 580 or greater. But borrowers with credit scores below 580 must put at least 10% down.
What factors make up your credit scores?
To understand how your credit scores affect your ability to get a loan and how you can improve your scores, you first have to understand what goes into your credit scores. There are five primary factors that affect your credit scores.
- Payment history — Do you pay your bills on time and repay money that you’ve borrowed?
- Credit utilization — What percentage of your total available credit are you using?
- Length of credit history — Do you have longstanding accounts? Or only new ones?
- New credit history — How often do you request new loans or lines of credit?
- Types of credit used — Do you have different types of credit on your report like revolving credit card accounts and installment loans?
How can you improve your credit scores?
If your credit is holding you back from buying a home or getting a good interest rate, then consider taking some time to improve it before you apply for a mortgage. Here are a few things you can do.
- Check your credit reports for errors: According to the Federal Trade Commission, as many as one in five consumers have at least one error on one of their credit reports. If there are errors on your credit report, they could be affecting your credit scores. You can dispute errors directly with the credit bureaus.
- Pay your bills on time: Your payment history is the most significant factor that affects your credit scores. Paying your bills consistently and on time is an effective way to increase your scores.
- Pay off existing debt: Your credit scores can be affected by your total amount of debt and the percentage of your available credit that you’re using, known as your credit utilization. A utilization rate below 30% is ideal.
- Avoid applying for new credit: Hard inquiries can negatively affect your credit in the short term. Avoid applying for new credit accounts or loans before applying for a mortgage.
- Keep your credit cards open: Closing a credit card account can hurt your scores if it reduces the length or average age of your credit history.
Your credit scores are an important factor that lenders will use when evaluating your mortgage application. Because there are several types of home loans, there’s not necessarily one specific credit score requirement you’ll have to meet.
No matter the type of loan, higher credit scores are beneficial not only for qualifying for a loan, but also for getting the lowest interest rate and best loan terms. If you’re planning to buy a home in the near future — or even the not-so-near future — now is a great time to start boosting your credit health to increase your odds of approval.