What Credit Score Do You Need to Buy a House?
Your credit score is like a GPA for how you’ve managed different credit accounts throughout your financial life. A 740 score or higher is the equivalent of a 4.0 GPA in the mortgage lending world, opening access to loans with lower interest rates and creating an easier path to approval.
However, you can buy a house with a credit score as low as 500, though you’ll pay a higher rate and need a larger down payment. Knowing what credit score you need to qualify for different mortgage programs can help you decide whether it’s time to buy or wait.
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What’s a good credit score to buy a house?
Most lenders require a 740 credit score or higher to qualify for the lowest mortgage interest rates, so anything above 740 is considered a very good score to buy a house. Armed with this score, you can secure a more affordable monthly payment and have more buying power when making purchase offers. Lenders often reward high-credit-score borrowers with fewer documentation requirements, a smoother approval process and exceptions for high debt-to-income (DTI) ratios.
That doesn’t mean you can’t get a mortgage with a score below 740. Most standard home loan programs require you to meet minimum credit score requirements, which range from 500 to 620.
THINGS YOU SHOULD KNOW
There are several types of credit scoring formulas, but most lenders use the FICO scoring system. The FICO Score is calculated using an algorithm based on your payment history, how you manage credit and the mix of different accounts you have.
Minimum mortgage credit score by loan program
Loans backed by government agencies like the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) cater to borrowers with credit scores as low as 500. Still, most homebuyers choose conventional loans to purchase homes, despite the stringent qualifying rules set by Fannie Mae and Freddie Mac, which require a minimum score of 620.
The table below breaks down the minimum credit scores for each loan program.
|Loan program||Minimum FICO Score|
|FHA||580 with 3.5% down payment |
500 with 10% down payment
|VA||No minimum requirement, though most lenders set their minimum between 580 and 620|
|Jumbo||700 or higher|
How to pick the right loan program for your credit score
Conventional loans are a good fit if you have a credit score of at least 620 and can make a 20% down payment. If you’re making a lower down payment, pay close attention to your private mortgage insurance (PMI) premium: The lower your credit score, the higher your mortgage insurance premium and monthly payment will be.
FHA loans are often the only choice for borrowers with a credit score between 500 and 619. You’ll pay for FHA mortgage insurance that includes an upfront premium of 1.75% of your loan amount and annual mortgage insurance premiums ranging between 0.45% and 1.05%. However, unlike with PMI, the premium percentage is the same regardless of your credit score.
VA loans can only be made to eligible veterans, active-duty service members, reservists and surviving spouses. Lenders don’t require mortgage insurance or a down payment. Although the VA has no minimum score requirement, most lenders set their minimum between 580 and 620.
USDA loans are guaranteed by the U.S. Department of Agriculture (USDA) to help low- and moderate-income buyers finance rural homes. No down payment is required, but you’ll pay upfront and annual guarantee fees that work like FHA mortgage insurance. The USDA doesn’t set a minimum credit score, but most lenders require at least 640.
Jumbo loans are your only choice if you’re borrowing above the conforming loan limits, and these loans are more common in expensive cities throughout the country. Most jumbo loan programs require a credit score of at least 700, although there may be programs with lower score limits if you can afford a higher interest rate and payment.
THINGS YOU SHOULD KNOW
Mortgage lenders typically pull credit history from all three of the main credit reporting bureaus — Equifax, Experian and TransUnion — to calculate your score. Then, they use the middle score to quote you a rate and approve your loan. You can get a free credit report from each credit reporting agency once a year. However, a mortgage credit report, obtained when applying with a lender, will give you a better idea of where you stand as a potential homebuyer. The typical cost for a mortgage credit report is between $30 and $50.
How a good credit score helps you buy a home
Besides a lower interest rate and monthly payment, there are some added benefits to buying a home with a high credit score. A good credit score can help you:
Get approved with more total debt. Lenders measure your DTI ratio by dividing your total debt by your gross income. Although most lending programs cap your DTI at 45%, a high credit score may allow them to make exceptions up to 50%.
Reduce your mortgage insurance costs. If you can’t quite swing a 20% down payment, you can at least keep your monthly PMI costs lower with a high credit score. PMI is usually part of your monthly payment.
Afford a more expensive home. Your credit score affects both your interest rate and mortgage payment, so it has an impact on how much house you can afford. Try our home affordability calculator to see the difference a few percentage points can make on the home price you qualify for.
The table below shows these numbers in action as we compare the interest rate, monthly payment and maximum home price you can buy with a higher and lower conventional credit score. The example also assumes you earn $85,000 per year and have $750 per month in nonmortgage debt.
|Credit score||Interest rate||Monthly payment||Maximum home price|
*Includes annual homeowners insurance premium of $800 and property taxes of $3,640 per year.
The bottom line: A low credit score reduces your homebuying power by $24,262 in this example.
How to increase your credit score before house hunting
If your eyes are set on homebuying, here are some things you can do now to boost your score.
- Shrink your credit card balances. As a general rule, avoid using more than 30% of your total available credit to maximize your scores. For the best scores, limit your monthly spending to less than 10% of your total available credit.
- Pay your bills on time. Even one recent late payment can send your scores into a freefall.
- Avoid authorized user cards. You’re responsible for charges as a primary cardholder. If an authorized user racks up a large amount of debt on the card and can’t pay it off, your credit score could take a hit.
- Don’t cosign on debt. Whether it’s a student loan or a car lease, your credit score could take a hit if a cosigned account is paid late, even if you’re not the primary user.
- Avoid multiple credit applications. Besides pulling your scores down, inquiries require explanations. You’ll need to dig up paperwork for any account that doesn’t show up on your credit report.
- Don’t open up new credit cards or take on new loans. Limit new credit applications within a year of applying for a mortgage to maximize your credit scores.
- Fix errors if you find them. Credit reports may have errors that you can fix by contacting the credit bureaus.
How to buy a house with bad credit
There are some steps that may help improve your odds of buying a house with low credit scores.
Make a larger down payment. Lenders may be more willing to consider a loan application with poor credit scores if you’re making more than the minimum down payment. Consider asking a relative for a gift, and stockpile those tax refunds and bonuses to build your down payment fund.
Pay down your debt to reduce your DTI. Another way to offset low credit scores is to get rid of as much debt as possible. Mortgage underwriters may look more favorably on an application with a very low DTI ratio, even if your credit history has some bumps in it.
Ask about nonqualifying mortgages. Known more commonly as non-QM loans, these mortgages don’t have to meet the stringent federal standards tied to common loan programs. Some non-QM loans even allow you to get a loan one day after completing a bankruptcy or foreclosure, as long as you have a large down payment and can afford a higher interest rate.