When you’re getting ready to buy a house, your lender will want to see your credit score, a three-digit number that represents how well you pay back debt.
Before you apply for a mortgage, keep in mind that your credit score represents one of the most important aspects of qualifying for a mortgage, but it’s not the only qualification.
So, what credit score is needed to buy a house?
Let’s find out. We’ll also guide you through other possible considerations when you’re planning to buy a house and explain how to increase your credit score before you submit your application to mortgage lenders.
Minimum Credit Score Needed By Mortgage Type
Your credit score can range from 300 to 850. Take a look at these general guidelines from FICO, a fixture of consumer lending in the U.S.:
- Excellent credit score: Higher than 720
- Good credit score: Between 690 and 719
- Fair credit score: Between 630 and 689
- Poor credit score: Below 620
Each type of loan has different minimum credit score requirements. Let’s take a look at conventional, FHA, VA, USDA and jumbo loan requirements.
Conventional Loan Requirements
Minimum Credit Score Required for Conventional Loans: 620
A conventional loan is not backed or insured by a federal government agency. Conventional loans break down into two separate categories: “conforming” and “non-conforming.” Conforming loans follow rules established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Non-conforming loans, on the other hand, refer to loans that aren’t bought by Fannie Mae and Freddie Mac. These include FHA, USDA, VA and jumbo loans, for example.
In general, conventional loan lenders don’t allow as much flexibility in terms of a lower credit score and/or no money down compared to non-conforming loan types.
FHA Loan Requirements
Minimum Credit Score Required for FHA Loans: 580
FHA loan lenders are backed by the Federal Housing Administration. FHA loans require a minimum down payment of 3.5% and a credit score of 500 or higher.
VA Loan Requirements
Minimum Credit Score Required for VA Loans: No industry-set minimum, but your lender may have a specific credit score requirement
The Department of Veterans Affairs backs VA loans, a type of military loan available to eligible active-duty service members, veterans and the surviving spouses of service members.
Similar to how the Federal Housing Administration backs FHA loans, the Department of Veterans affairs protects lenders in case those who borrow default on their loans.
Check with your lender to determine the credit score needed for a VA loan.
USDA Loan Requirements
Minimum Credit Score Required for USDA Loans: No industry-set minimum, but your lender may have a certain credit score requirement
The U.S. Department of Agriculture offers insurance for lenders using USDA loans. You may want a USDA loan if you live in an eligible area and are looking to buy a house in a rural or suburban neighborhood. In addition, you must have an income that falls below 115% of the area’s median income level.
Check with your lender to determine the credit score needed for a USDA loan.
Jumbo Loan Requirements
Minimum Credit Score Required for Jumbo Loans: In the 700 range
Jumbo loans fall into the category of non-conforming loans. This means they go above the conventional loan limits established by Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac set the limits for conforming loans. You can only borrow up to $548,250 for a single-family unit in most parts of the U.S. in 2021. In areas where the median home price soars over the national average, you’ll find that the limits are much higher.
Take a look at the conforming loan limits map to learn the limits for your area.
Because jumbo loans are riskier, your lender will require you to have a higher credit score, typically above 700, depending on your lender.
How Does Your Credit Score Impact Mortgage Interest Rates?
To calculate your interest rates, your lender will do a hard credit pull — this occurs when you apply for any type of loan or line of credit. Your lender uses the credit score to determine how much your monthly payments will be. The lender also considers your debt to income (DTI) ratio, loan-to-value (LTV) ratio and your income, which we’ll go over below.
Your credit score can impact how much you’ll pay in interest with some lenders offering better rates for well qualified borrowers — but other components of your financial picture also influence that figure as well.
Understanding Your Credit Score
Your creditors (such as your credit card company) report your payment history, current debt and other financial details to the major credit bureaus — Experian, Equifax and TransUnion.
Many lenders use FICO Scores to report your credit score. FICO uses a unique, industry-standard algorithm to determine credit scores.
Many factors are taken into consideration to build your score, including the following:
- Whether you make payments on time
- Amount of available credit used
- Length of your credit history
- Your new credit history
- Types of credit you use
You can check your credit score with a free credit report from each of the three major credit bureaus every year, through annualcreditreport.com. This helps to ensure there are no errors on your reports. For example, a creditor may accidentally report that you haven’t finished paying off a personal loan, when you actually have already paid it off.
Other Considerations When Buying a House
In addition to your credit score, your lender will also take into account several other factors that determine how much your mortgage payments will be:
- Debt-to-income (DTI) ratio: You may want to consider shooting for a DTI of about 43% or less. Your DTI ratio tells your lender how much money you spend versus the amount of money you make. You can calculate it by taking your minimum debt payments and dividing them by your monthly pre-tax income and then multiplying that number by 100.
- Loan-to-value ratio (LTV) ratio: The LTV ratio refers to the amount of loan you take relative to the value of the property you plan to buy. You can calculate it by dividing your loan amount by the value of the property, then multiplying by 100. You can reduce your LTV ratio by putting down a larger down payment for a home or buying a less expensive home.
- Income and assets: Your lender will take a look at your income and assets to make sure you can cover your mortgage payments each month. Your income and assets will also help your lender gauge the level of risk you present to them. This will affect your interest rate and payments.
Can You Get a Mortgage with Bad Credit?
It’s important to remember that lenders will take other factors into consideration, like those listed above. Your credit isn’t the only thing that determines your loan eligibility.
In other words, it’s possible to get a mortgage with less-than-stellar credit.
How to Increase Your Credit Score Before Buying a House
You may want to increase your credit score before you buy a home. Take a look at these tips to improve your credit score so you get the best mortgage rates possible.
Tip 1: Pay off outstanding debt.
You reduce how risky you look to your lender when you lower the amount of debt you owe. Your lender will also take a look at your credit utilization ratio, which refers to the amount of credit you use out of how much credit is available to you.
For example, the more you charge to your credit cards, the higher your utilization will be. Try reducing the amount you spend and pay your credit cards on time.
You could take a look at other debts you have, such as an auto loan or personal loan, and come up with a payment plan. This could free up more “room” to take on mortgage debt.
Tip 2: Pay your bills on time.
When you pay your bills on time, you increase your credit score. Your payment history has the highest impact on your credit score. You’ll see in this breakdown that it’s one of the most important factors in FICO Scores:
- Payment history (35%)
- Credit usage (30%)
- Age of credit accounts (15%)
- Credit mix (10%)
- New credit inquiries (10%)
A history of on-time payments can increase your credit score if you do it reliably for several months.
Tip 3: Don’t apply for too much credit.
In the months prior to applying for a mortgage, you may not want to apply for too many other lines of credit. This could include steering clear of applying for credit cards, personal loans and more. Too many hard inquiries could lower your credit score.
Tip 4: Have a good credit mix.
Protecting your credit score involves having a good credit mix. In other words, you may want to have a variety of types of credit. Whether you have student loans, credit cards or auto loans, having a wide range of credit types can also help with building your credit.
Credit Scores: Important Factors When Buying a Home
Your income, assets, DTI and LTV ratio will also make a difference in the type of mortgage rates you’ll qualify for from your lender. You have the option to take charge of your credit score by checking your credit reports for errors, paying your outstanding debts, paying your bills on time, not applying for too much credit and having a good credit mix.
Ready to jump into buying a home but not sure about your credit score? Learn more about using credit responsibly with Morty.