What is the Credit Score Needed to Buy a House?

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Credit score affects homebuying in two ways. The most popular way that credit score impacts homebuying is the rate a lender is willing to offer the homebuyer. Homebuyers with excellent credit are familiar with this factor and leverage their excellent credit in exchange for a lower mortgage rate. On the other hand, homebuyers with lower credit scores find out that mortgage rates are sometimes less favorable, or a discount point or a rate buydown is needed to get a competitive mortgage rate. This rate variation above market rate is called a Loan-Level Pricing Adjustment (LLPA) and is used by mortgage lenders to manage risk. This can change the minimum credit score for home loans. 

The second factor that credit score impacts is loan qualification. This can be the most critical part of whether or not a lender will approve a mortgage loan. There are several ways to determine the credit score needed to get a home loan. The first parameter is loan type. FHA loans, VA loans, Conventional loans, USDA loans, and other loan types have minimum credit scores. Furthermore, each lender could have credit overlays that will alter the credit score requirement. Another parameter is down payment. The homebuyer’s down payment affects Loan-to-Value (LTV) and can require a different minimum credit score. Other criteria such as property type, location, and loan purpose can impact LLPA and require a different credit score. Find out the credit score needed to buy a house. 

Although you do not have to be a first-time homebuyer to take advantage of the benefits of an FHA loan, this type of home loan in popular for new homebuyers looking for a home loan with minimal credit score qualifications. FHA loans do not have a minimum credit score requirement. Again, FHA loans do not have a minimum credit score requirement. This is likely the main reason new homebuyers prefer FHA loans over Conventional loans. However, if you are looking to take advantage of FHA’s minimum 3.5% down payment requirement, then a credit score of 580 for an FHA loan is likely to be required. There is one exception to the minimum credit score requirement of 580 for the 3.5% down payment. That exception is for homebuyers with little or no credit history. 

Homebuyers without a credit score can still apply for an FHA loan and take advantage of the 3.5% down payment even if they do not have a credit score. In this case, the homebuyer’s loan will be manually underwritten and evaluated under different circumstances. An FHA manual underwrite will require supplemental credit tradelines, a lower DTI ratio, and possibly other compensating factors. Homebuyers with credit scores that report lower than 580 and above 0 will be required to a minimum of 10% down payment to be considered for an FHA loan. 

Since FHA loans are designed to be used for primary residence, the subject property’s occupancy is not a factor that will impact the credit score needed to an FHA home loan. The loan purpose of the FHA program for a refinance or streamline refinance will usually not deviate the credit score requirements for home purchase loans but using an FHA loan for a cash-out home equity loan will have specific lender requirements when it comes to the minimum credit score needed. 

Many veterans and active military members are under the misconception that they need a credit score of at least 620 to qualify for a VA home loan. VA home loans are similar to FHA loans in the sense that there is no minimum credit score needed to take advantage of the VA home loan benefit. However, Competitive Home Lending, a VA approved mortgage broker, is here to clear the air and inform veterans that they can qualify for a VA home loan with a credit score as low as 500.

This means that veterans with a credit score of 500 can still qualify for 100% financing of the home's purchase price, without having to put any money down. This is a significant opportunity for veterans who may have faced financial challenges in the past, but are now ready to become homeowners. 

Important: working with a mortgage broker is critical if you are a Veteran with a low credit score looking for 100% financing of the home’s sales price. 

The VA IRRRL program usually will not require a credit score. The VA cash-out home equity loan can have a lender overlay and require either a higher score or a lower loan-to-value ratio. Talk to an approved VA mortgage lender to discuss your VA loan options based on your credit score for these types of loans. 

Fannie Mae and Freddie Mac loans have a credit score requirement that is a bit more defined. The minimum credit score for Conventional loans is 620. These types of loans are influenced by other factors such as LTV, loan purpose, and subject property occupancy. LTV can alter the minimum credit score required for Conventional Loans. The exception is with the affordable loan products. Talk to our loan officer about these programs. The purpose of the Conventional loan can also change the minimum required credit score needed. For example, cash-out home equity loans will usually require a higher credit score or a lower LTV if a homeowner has a lower credit score. Since Conventional loans can be used for primary residence, second homes, and investment properties, the minimum credit score needed for each occupancy type will be determined on how the home loan will be used. 

Having a good or excellent credit score is not only a badge of honor in today's world, but it is also crucial for financial survival. More and more of our spending these days depends on using credit and a good credit score is what makes that possible for each individual. Getting and maintaining an excellent credit score may seem impossible for some, but if you know about the different things that impact credit scores, you will find it is not as difficult as you might think. There are simple things everyone can do to improve their credit score and to experience the joys of having a higher credit score than most. Learn about all the things that impact the credit score needed to buy a house and how you can make them work in your favor.

Credit scores are calculated based on a number of factors. Some are quite obvious and expected but others are not. By tweaking your credit portfolio in small ways, you can improve your credit score immensely even if some of the larger pieces - like payment history and debt ratio - are not all that great. Your credit score is always in flux. If your credit score is terrible (under 500), you may feel lost and defeated and you may be ready to give up on credit altogether. However, in time and with effort, you should be able to get your credit score back to good (620 to 700) or even all the way to excellent (700 to 850) in time. Improving your credit is possible. You just need to be aware of the things that impact credit scores and act upon them.

There are a number of factors that can make your credit score higher or lower. Fortunately, they are all under your control. 

• Payment History

Payment history is a major factor when it comes to your credit score. You knew this even before you signed up for your first credit card. Credit cards are wonderful and allow us to make purchases and delay payment. However, you know that you have to pay for these purchases down the road. If you want to have a good or excellent credit score, it's crucial that you pay your credit card on time and pay it every single month. Every time you are late with a payment or skip one altogether, your credit is impacted in a negative way. This also goes for any bills that you must pay beyond credit cards. If you don't pay other debts to utilities, landlords, loans, or taxes, a collections agency will likely be contacted. Every time this happens, your credit score plummets. The more frequently this happens, the less likely a creditor will be to give you credit in the future. Even if you have a history of late or non-payment, it's never too late to make a change. Don't give up. If you want to improve your credit, you must start paying at least the minimum amount due on your debts every single month and on time. Once you get in this habit, in time your credit will improve. 

• Amount of Debt

The amount of debt you have is another major piece of the puzzle when it comes to credit score calculation. This factor accounts for 30% of the score calculation, which is only a little less than the payment history factor at 35%. The amount of debt you have is looked at in a few different ways. First, the overall amount of debt that you carry plays a big part in this calculation. Second, and perhaps more importantly, that debt is looked at in relation to how much credit you have. If you are using almost all of your available credit, your credit score will decrease. Finally, the amount of debt you have paid off compared to what you borrowed is a factor as well. For best results, you should only be using around 30% of your available credit at any given time. This demonstrates responsible use of credit, and your credit score will reflect this fact. Talk to your local mortgage company to find out if any debt can be omitted. 

• Age of Credit History

Young people tend to have lower credit scores than older people, even if they haven't made any credit mistakes yet. This is because they have not had their accounts open very long. Whether you are young or began using credit at a later age, your score will be lower to warn potential creditors that you are not that experienced in the credit realm quite yet. As time goes on, if you do everything right, your credit score will increase. It's a good idea to hold onto some of your credit cards for many years. The longer you keep the same cards, the better your credit score will be because it shows staying power. Some people open and close new accounts to get a lower interest rate or to get perks like airline and hotel miles. This is okay in moderation, but if you overdo it, your credit score will suffer. If you are working on your credit score to buy a house, remember that improvement takes time.  

• Types of Credit Accounts

Another factor that impacts credit scores is the types of credit accounts you possess. If you only have credit cards or loans, your credit will be lower than if you have both. Having more than one type of credit on your account shows that you are able to be responsible with different types of accounts, which is attractive to lenders. If you want to buy a home, having different types of credit on your account will help you to get a home mortgage loan. 

• Credit Inquiries

Every time you apply for a new credit card or loan or a home loan or even an apartment lease, a credit check is performed. The more of these you have done, the more your credit score will decrease. A few credit inquiries won't affect your score, but if you apply for a lot of credit from a bunch of different lenders in a short time, you will notice a change. Fortunately, credit inquiries no longer affect your score after twelve months. If you have prompted a large number of credit inquiries in a short time, you simply have to wait it out and you will soon see improvement.

Credit scores can be frustrating and if yours is not great, it can feel like a great weight is upon your shoulders. However, now that you have a better understanding of the things that impact credit scores, you can begin to make the changes you need to improve your own score. Talk to us about credit score simulators. It is a great way to set credit score goals with realistic and attainable credit score targets. We'll give your a copy of step-by-step instructions on how to improve your credit without paying a credit repair company.  

It takes time, but with patience and perseverance, you will have a credit score to be proud of in no time. Good luck! If you are wondering if your credit is good enough for a home loan, contact us today. We are here to answer any questions and can help you begin walking through the process right away.