The Credit Score You Need To Buy A House

Your credit score is one of many factors lenders look at when evaluating your mortgage application. A high credit score helps you qualify for the loan and score the best rates and terms on your mortgage.

The credit score needed to buy a house largely depends on the type of loan you’re applying for. It’s a good idea to understand how your credit score works and the different factors impacting it. This information can help you take steps to improve your score before buying a house.

What’s A Good Credit Score To Buy A House?

Many lenders require a minimum credit score of around 620 to buy a house with a conventional mortgage loan. However, there are other loan options that might approve borrowers with credit scores as low as 500.

For example, FHA loans let you qualify for a mortgage with a credit score as low as 500 or 580, depending on your down payment. If you qualify for a VA loan, you may not have any credit score requirements, but typically 580 is the minimum required. However, a credit score of 740 or higher is ideal since that will allow you to qualify for the best rates and terms on your mortgage.

Why Your Credit Score Matters When Getting A Mortgage

If you have a high credit score, you’re less likely to default on your mortgage. Since your lender sees you as less risky, they’ll be willing to offer you lower interest rates and better loan terms. So it’s important to understand what a good credit score is and what lenders are looking for when they evaluate mortgage applications.

Credit Score Categories: What They Mean

Most credit scores fall in the range of 350 to 850, and the higher your score, the better. Most lenders look at FICO^® Scores to make lending decisions. There are five different categories you can fall into based on your credit score, and each one impacts your loan terms.

• Exceptional credit score: If your credit score is above 800, it’s considered exceptional and indicates to lenders that you’re a very low lending risk.
• Very good credit score: Credit scores between 740 and 799 are considered very good and will help you qualify for the best rates and terms on your loan.
• Good credit score: If your credit score is between 670 and 739, it’s considered a good score and is still higher than the average U.S. consumer. 
• Fair credit score: A credit score between 580 and 669 is considered fair and is below the average score for U.S. consumers. Some lenders will be willing to work with you, but you’ll likely have higher rates and fees on your loan.
• Poor credit score: Any credit score below 580 is considered poor and indicates you’re a high lending risk. If you have a poor credit score, you’ll receive the least favorable loan terms, assuming a lender is even willing to work with you.

What Lenders Look For In Your Credit Score

Here are the different factors lenders look at when evaluating your credit score:

• Payment history: Your payment is the main factor lenders look at, and it accounts for 35% of your credit score. Payment history shows whether you pay your bills on time, and shows how much of a lending risk you are.
• Credit utilization: Your credit utilization is the percentage of your available credit that you’re currently using. It accounts for 30% of your FICO^® Score since a high credit utilization indicates you may be financially overextended.
• Length of credit history: The length of your credit history accounts for 15% of your FICO^® Score. Lenders want to see that you have a long track record of keeping your credit accounts in good standing.
• New credit: Lenders also want to see whether you’ve opened any new credit accounts recently. New credit accounts for only 10% of your FICO^® Score.
• Credit mix: Finally, lenders like to see that you’ve maintained a variety of credit accounts, like credit cards, installment loans and a mortgage. Your credit mix also accounts for 10% of your credit score.

Credit Bureaus And Scoring Models: What To Know

The three major credit reporting bureaus are Equifax^®, Experian™ and TransUnion^®. Though the credit bureaus all collect similar information, you may have slightly different scores from each one.

That’s because not all lenders report credit information to all three bureaus. Some lenders may only report to one or two credit bureaus, and some may not report the information at all.

In addition, there are various credit scoring models, and FICO^® Score and VantageScore^® are the most popular. Different credit scoring models may weigh certain factors in your credit report more heavily than others.

For example, your payment history accounts for 40% of your VantageScore^® but only 35% of your FICO^® Score. Most lenders will use an average credit score from various reporting agencies.

Minimum Credit Score To Buy A House (By Loan Type)

The minimum credit score requirements vary depending on the type of loan you’re applying for. Let’s look at the minimum credit score you’ll need to apply for different types of mortgages. 

Conventional Loan Credit Score Requirement: 620

Conventional loans aren’t backed by any government agency, and they aren’t as difficult to qualify for as you might think. You’ll need a minimum credit score of 620 and at least a 3% down payment.

However, if your down payment is less than 20%, you will have to pay for private mortgage insurance (PMI). You can get rid of PMI once you reach 20% equity in your home.

Lenders also want to see that you have a reliable source of income so you can make your monthly mortgage payments. They’ll most likely want to see 2 years of consistent employment, which you can verify with pay stubs and bank statements.

FHA Loan Credit Score Requirement: 500-580

FHA loans require a minimum credit score of 580 with a 3.5% down payment. If you’re able to make a 10% down payment, you can qualify with a 500 credit score. You also must have a debt-to-income (DTI) ratio below 43%, and the home must be your primary place of residence.

FHA homebuyers are also required to purchase an upfront and annual mortgage insurance premium (MIP). You’ll pay the upfront premium at closing and the annual premium once per year. Unlike PMI, you’ll pay MIP for the entire loan term unless you refinance the mortgage.

VA Loan Credit Score Requirement: None

VA loans don’t come with any minimum credit or down payment requirements, and you don’t have to purchase PMI. However, each lender is free to set its own minimum credit requirements. The standard credit score lenders require for VA loans is 580.

VA loans are only available to veterans, active duty service members and eligible surviving spouses. When you apply, you must provide your lender with a Certificate of Eligibility (COE) which shows them you meet the VA’s service requirements.

USDA Loans Credit Score Requirement: 640

USDA loans require a minimum credit score of 640, and you need to show that you have a steady source of income. These loans are for low-income borrowers, so your adjusted household income must be equal to or less than 115% of the area median income.

Most importantly, your home must be located in an eligible rural area. You can use the USDA’s property eligibility map to see if the home you’re buying qualifies.

Jumbo Loan Credit Score Requirement: 680

A jumbo loan exceeds the maximum loan amounts set by Fannie Mae and Freddie Mac. In most states, a jumbo loan exceeds $766,550. However, in certain high-cost states, a jumbo loan is not required until the loan exceeds $1,149,825.

Jumbo loans require a minimum credit score of 680 and a down payment of at least 10%. Because of the size of the loan, you may need to show additional financial information. And most lenders will want to see a cash reserve of 6 – 18 months. If you want to learn more, you can check out Rocket Mortgage’s jumbo loan requirements.

Other Factors Lenders Consider Before Approving Your Mortgage

Your credit score isn’t the only factor lenders consider when evaluating your mortgage application. Here are four additional factors lenders will look at before approving your mortgage.

Your Income

Your income reflects your ability to make a monthly mortgage payment under the mortgage loan terms. You can show proof of income by providing your lender with your W-2, pay stubs, bank statements and tax returns.

Your Down Payment

The higher your down payment, the less money you have to borrow from the lender. Plus, a substantial down payment shows you’re more invested in the loan, so your lender sees you as less of a risk. Making a sizable down payment not only increases your odds of approval but also helps you qualify for the best rates and terms on your loan.

Your Debt-To-Income Ratio

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that’s going toward debt payments. Debt payments can include things like car payments, student loans or credit card payments. Most lenders want to see that your DTI ratio is below 43%.

Your Employment History

Lenders want to see not only that your income is sufficient to meet your financial obligations but that you have a consistent source of income. Most lenders will want to see that you’ve had steady employment for at least 2 years, so it’s best to avoid switching jobs before applying for a mortgage. 

How To Improve Your Credit Score To Buy A House

If you have bad credit, here are a few ways you can improve it before applying for a mortgage.

Check Your Credit Report For Errors

According to the Federal Trade Commission (FTC), one in five borrowers will have an error on their credit report. Even one derogatory mark can have a significant impact on your credit score, so it’s a good idea to check your credit report at least once a year. Fortunately, you can get a free copy of your credit report through resources like the Rocket Money^SM app or AnnualCreditReport.com.

Pay Down Your Debts

Your credit utilization accounts for 30% of your FICO® Score, so paying down any outstanding debt is one of the quickest ways to improve your score. Plus, paying off your debt will improve your DTI ratio, which will also improve your odds of getting approved for a mortgage.

Pay Your Bills On Time

Paying your bills on time also has a significant impact on your credit score. It shows lenders that you’re a reliable borrower and can be trusted to make your mortgage payment on time. If you have trouble remembering to pay bills on time, setting up automatic payments can help.

Keep Old Accounts Open

The age of your credit history impacts your score, so it’s a good idea to keep old credit accounts open. Plus, keeping old accounts open could also improve your credit utilization rate.

Don’t Apply For New Credit

Opening a new credit card right before applying for a mortgage can negatively impact your credit score. When you apply for a new line of credit, it will trigger a hard inquiry on your credit report, which can cause your score to drop.

The Bottom Line

The credit score you need to buy a house largely depends on the type of mortgage you’re applying for. Most conventional loans require a minimum 620 credit score, but government loans have more flexible credit requirements. 

Your credit score isn’t the only factor lenders look at, but it does help determine the types of mortgage rates and terms you receive. If you need help managing your credit score and monthly bills, you can download the Rocket Money app today.