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What Credit Score Is Needed to Buy a House?
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You don’t need a perfect credit score to buy a house. However, knowing what credit score is needed for a mortgage can help you decide if it’s time to buy or wait, and whether you need to take extra steps to boost your score.
Think of it like this: Your credit score is like a GPA for how you’ve managed different credit accounts throughout your financial life. A 740 score is the equivalent of a 4.0 GPA to the mortgage lending world, opening access to lower interest rates and creating an easier path to loan approval.
- What credit score is needed to buy a house?
- What is a good credit score to buy a house?
- What low credit score mortgages are available?
- How to boost your credit score for a home loan
What credit score is needed to buy a house?
It’s possible to buy a home with a credit score as low as 500 with a 10% down payment. However, lenders charge higher rates to offset the risk of default, so the payment may strain your budget.
The minimum credit score for a mortgage varies based on the loan program:
- Conventional loans: A 620 credit score is required to be approved. Conventional loans are popular because they typically cost less than government-backed loans, such as those offered by the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA).
- FHA loans: A 500 credit score is enough to be approved for a loan insured by the FHA with a 10% down payment. You’ll need a credit score of at least 580 to make a 3.5% down payment.
- VA loans: Home loans guaranteed by the VA don’t have a minimum credit score, but many VA-approved lenders require a score of at least 620. Eligible veterans, active-duty service members, reservists and their spouses can apply for a VA home loan.
- USDA loans: Low- and moderate-income buyers in rural areas need a 640 score for loans guaranteed by the U.S. Department of Agriculture. Lower scores may be approved on a case-by-case basis.
- Jumbo loans: Homebuyers borrowing more than the current conforming loan limit of $510,400 typically have an average credit score of 800. There’s no set minimum credit score, but the trade-off for a lower credit score on a jumbo loan is usually a more expensive rate.
Mortgage credit score tip
Mortgage lenders typically pull credit history from all three of the main credit reporting bureaus, using the middle score to quote you a rate and approve your loan. Although you may obtain a free credit report, that information is typically from only one of those credit reporting agencies — Equifax, Experian or TransUnion. On the other hand, a mortgage credit report — obtained when applying with a lender — will give you a better idea of where you stand for a home loan application. The typical cost for a mortgage credit report is $30.
What is a good credit score to buy a house?
A conventional loan credit score of 740 or higher may get you the lowest interest rate and monthly payment. In addition, a good credit score can:
- Help you get approved with more debt. Your debt-to-income (DTI) ratio is a measure of how much debt you have compared to your gross income. The Consumer Financial Protection Bureau (CFPB) recommends a DTI of no more than 43% to ensure you can repay your mortgage. However, you might be approved for up to 50% with a higher score.
- Reduce mortgage insurance costs. If you can’t come up with a 20% down payment, lenders usually charge mortgage insurance to protect themselves against default risk. Conventional loans require private mortgage insurance (PMI), with premiums typically ranging between 0.15% to 1.95%, depending on your credit score. The PMI is normally added to your monthly mortgage payment.
- Allow you to buy a more expensive house. Because your credit score affects both your interest rate and mortgage payment, it also impacts how much house you can afford. The higher the credit score, the lower the payment and the more expensive the house you can buy. That being said, you should always leave some rainy-day room in your budget instead of stretching your mortgage payment to the max.
The best way to connect the dots from your credit score to the maximum home price you can afford is to see high and low credit scores in action. First, we’ll compare the interest rate and monthly payment difference between a high and low conventional loan credit score on a $250,000 house with a 5% down payment.
|Credit score||Interest rate||Principal and interest payment||PMI||Total principal, interest and private mortgage insurance payment*|
|*Reflects principal, interest and mortgage insurance only. Doesn’t include homeowners’ insurance, property taxes or homeowners association dues.|
The difference in these two examples is $372.76 a month. That adds up to $4,473.12 a year, or $134,193.60 over the life of a 30-year, fixed-rate mortgage.
Because a higher payment increases your total DTI, it reduces the target price of homes you can qualify for. The table below shows the most expensive home you could buy with a $60,000-a-year per salary, assuming you have a $300 monthly car payment and $200 monthly in credit card debt.
|Interest rate||DTI||Maximum home price|
|*Based on 17% down payment; includes $800 in annual homeowners insurance and $3,640 per year in property taxes|
In this example, the lower credit score cuts your qualifying power by $31,602 based on a 43% DTI (the maximum DTI recommended by many conventional lenders). What does that mean? You might have to settle for a smaller house or stay on the sidelines and work on improving your credit.
Mortgage insurance savings tip
If you have a low credit score, it may make more sense to apply for an FHA mortgage. FHA mortgage insurance premiums (MIPs) are not impacted by your credit score. The catch? There’s an extra upfront mortgage insurance premium (UFMIP) of 1.75% added to the loan amount to cover the extra risk that FHA lenders take on lower credit score borrowers.
What low credit score mortgages are available?
If you’re fed up with renting and want to apply for a home loan with bad credit, government-backed mortgage loan programs may help. Furthermore, if you don’t have a credit score, there’s still a way to get home loan financing.
- FHA loans: For traditional mortgages, the lowest credit score to buy a house is 500. Besides coming up with 10% for a down payment, you’ll likely need a solid income history, extra reserves and a lower DTI ratio. The FHA program is more commonly offered as a 580 credit score home loan for borrowers with at least a 3.5% down payment.
- VA loans: Although VA home loans don’t have a particular minimum, your credit history is still important. If you have a poor credit payment history, other compensating factors — such as extra reserves in the bank or a lower DTI ratio — may be required.
- Nontraditional credit (no credit score) loans: Recent college graduates might not have enough credit history for a regular credit score. However, they still may be able to get a mortgage with no credit score by proving on-time payments for bills such as rent and utilities.
- Alternative mortgage loans: Recent foreclosures or bankruptcies may knock your credit score down, and in most cases, applicants must wait two to seven years before applying for a new mortgage — unless they apply for an alternative mortgage loan. With a large down payment, alternative lenders may offer home loans to borrowers one day after a major credit event with scores as low as 350.
How to boost your credit score for a home loan
Here’s what you can do to boost your credit score if homebuying plans are in your future. Even a few of these tweaks could have a big impact on your score.
- Clean up your credit card usage. Credit cards can be a friend or a foe, depending on how you use them. Try to follow these tips:
- Don’t charge more than 30% of your credit limit
- Don’t ever be late on your payments
- Remove yourself as an authorized user on credit accounts to avoid surprises caused by other users
- Don’t cosign with anyone. Even if you’re not the primary user, a missed credit payment on a cosigned loan will appear on your report if the borrower pays late.
- Pay your bills on time. Paying on time is the fastest path to a higher credit score.
- Avoid multiple credit applications. Besides pulling your credit scores down, inquiries have to be explained. Paperwork will be required for any new accounts that don’t show up on the credit report.
- Check for errors and get them fixed. Credit reports may have incorrect information. If you see an error that can be fixed, contacting the credit bureau to correct it could ramp up your score.
Credit qualifying tips
How you use credit also affects your DTI ratio. These bonus credit qualifying tips may keep you from making a credit decision you’ll regret later.
- Don’t take out a short-term, low-interest rate car loan right before you apply for a mortgage. The rate may be great, but the monthly payment could knock your DTI ratio out of whack.
- Get an income-based repayment (IBR) schedule in writing before you apply for a mortgage with a student loan. Some programs have more lenient IBR student loan payment requirements to buy a house, but you’ll need it in writing or the worst-case guideline will be applied.