Credit checks are a basic part of renting property or buying or leasing a car, and similarly, your credit matters when it comes time to buy a home.
Not only will your FICO Score determine whether or not you can qualify for a mortgage, it impacts your loan terms. So, you may ask “What’s the best credit score to buy a house?”
The answer, like the concept of credit scores itself, isn’t that simple. While, to some degree, it boils down to “high credit score is good, low credit score is bad,” it isn’t that cut and dry. You can still qualify for a mortgage with bad credit.
While there’s no singular ideal credit score to buy a home, it’s important to understand how your credit score impacts home buying. In this piece, we’ll discuss credit score minimums required for some mortgages and explore different home buying scenarios for varying credit quality.
Briefly, before we discuss credit scores, you should understand what a credit score is. As the name suggests, it’s basically a numerical assessment of how well you manage debt. Your FICO Score uses different variables on your credit reports from the three main credit bureaus (Equifax, Experian and TransUnion) to calculate a score that ranges from 300 - 850.
The following factors all impact your credit score:
The higher your score, the easier it is to secure a loan. So if any of these factors have been a problem in the past, it’s a good idea to work on improving them now.
Mortgage lenders use your FICO Score to calculate interest rates and the fees you’ll pay through the life of your mortgage. It’s an important factor in determining what you can qualify for and how much you’ll pay on top of the loan itself, but it’s not the end-all-be-all.
Lenders also assess your income, property type, assets, and debt levels to decide on a loan. Since those factors can all vary significantly, there’s really no precise credit score you need to qualify for a loan. Still, there is good and bad.
You don’t need sterling credit to get a mortgage, especially if you earn good money or have other high-value assets like stock holdings or an art collection. That said, most loan types do require a minimum credit score.
A score of 620 is the absolute minimum to qualify for conventional loans from most lenders. Many lenders won’t even go this low. Over the past two years, the average home buyer has a credit score of 717.
Borrowers with credit scores below 700 can expect to pay a higher interest rate over the lifetime of the loan. Also, if you make a down payment of less than 20% on a conventional loan, you’ll also have to pay private mortgage insurance (PMI). A lower credit score can increase the PMI cost, as well.
The best option for buyers with poor credit is a Federal Housing Administration (FHA) loan. These government-insured home loans require a credit score of just 500 to qualify. However, if your credit score falls between 500-579, you must make a 10% minimum down payment. If your score is 580 or better, you can make a down payment as low as 3.5%.
Unfortunately, lenders can impose their own credit minimums for FHA loans, so you can’t always expect to find a lender who will accept a 500 credit score. That’s just the absolute minimum requirement that exists for these loans. If your score is under 600, most lenders will look at the rest of your financial situation with intense scrutiny.
Mortgages guaranteed by the Department of Veterans Affairs are known as VA loans and are a great option for qualified veterans or active-duty service members to buy a home. These no-down payment loans have a higher credit score minimum than even conventional loans, however.
Since you can secure a loan without a down payment, lenders want to see a higher credit score as proof of your ability to pay back the loan. There is no legal minimum for these loans, so lenders can impose their own minimums.
USDA loans are guaranteed by the US Department of Agriculture and have fairly stringent qualification requirements. Like VA loans, lenders set their own minimums for USDA loans but they generally fall in the mid-600s. If your score is over 640, you could qualify for streamlined credit processing.
In rare circumstances, buyers may pursue a mortgage that’s larger than the conforming loan limit. (Think buying commercial property or a big investment property.) Because these loans are for massive amounts, they’re inherently risky to lenders so they want to see an excellent credit score.
To get the best rates on a jumbo loan, you’ll need a credit score higher than 740, but you can qualify with some lenders at 700.
As we’ve stated, there’s no ideal credit score to buy a house. Generally speaking, you’ll need a credit score of at least 620 to secure a mortgage. You can still get a loan with a lower credit score but you may need to meet additional qualification requirements for government-backed loans.
Remember what we said earlier? The average home buyer over the past two years has a credit score of 717. That varies between states but it’s the closest marker of a “good” credit score we can provide.
If your credit score is higher than 750, you’ll qualify for the best rates and lowest PMI costs if you can’t make a 20% down payment. You’ll always pay interest, however, so even if your credit score is over 800, it won’t make interest rates simply disappear.
If your credit score falls below 600, you probably can’t get a conventional loan. A score that low signals a history of running up debt and failing to pay it back on time.
If you’re in the 600-650 range, expect to pay higher interest rates and higher PMI, or you’ll need to come up with a larger down payment to offset the mortgage cost and the risk to the lender. You can still qualify for a mortgage with bad credit, just expect to spend a lot more money for the mortgage in the long-term.
If you can’t qualify at all, consider finding a co-signer with a better credit score to help you secure a loan. This could be a family member or friend who is willing to assume some of the risk of the mortgage to help you secure better terms — or secure a loan in the first place. This person could also buy the house themselves and then refinance the mortgage into your name later when you’ve improved your credit score. If you're married, then you could take out mortgage under the name of one spouse who has the better credit score.
Otherwise, you just have to do the work of improving your credit score.
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