What credit score is needed to buy a house? 

 October 5, 2020

By Scott Teesdale  

minutes read time

One of the most important factors to consider when buying a home is your credit score. Credit scores play a huge role when you are preparing to buy a house, which includes getting a home mortgage. If you have a high credit score, the chances of securing mortgages with little money down are high.

As a home buyer, you don’t need to have a perfect credit score of 850 to get the best mortgage rates. But it would be best if you aimed to have a strong credit score to qualify for best interest rates and terms on home mortgages.

You need to know that minimum credit scores vary from lender to lender. They also vary based on who insures the mortgage and the type of home loan if you’re a first-time buyer.

Want to know the minimum credit score requirements for different mortgage loans? In this post, we’ll discuss what credit score is required to buy a house.

What are the minimum credit score requirements by mortgage loan type?

The credit score needed to buy a home depends on the mortgage loan type. There are different types of mortgage loans, and each has its own minimum credit score.

Here are five types of mortgage loans

  • Federal Housing Administration
  • Conventional Loans
  • Jumbo loans
  • USDA Loans
  • VA Loans

Federal Housing Administration

A Federal Housing Administration loan or FHA is a type of mortgage loan available to borrowers deemed high risk due to low credit scores. The Federal Housing Administration generally issues the loan. Created by the National Housing Act of 1934, the agency’s mission is to operate loan insurance programs and boost home construction.

As a borrower with a high credit score, you qualify to make a lower down payment as follows:

  • 500 credit score requires a 10% down payment
  • 580 credit score requires a 3.5% down payment

You need to know that while FHA insures loans with a 500 credit score, the lender will require that most liens and collections be paid off before closing. Also, if you apply for an FHA loan with your spouse, lenders will consider the lower of the two credit scores.

Conventional loans

A conventional mortgage loan is a home buyer’s loan not secured or offered by a government agency such as FHA. This type of mortgage loan is generally guaranteed by a private lender such as a bank.

Is a conventional loan good? Of course, a conventional loan is a wonderful option for borrowers, especially those with little debt and a strong credit score. With a healthy credit score, you can avoid taking out primary mortgage insurance, or PMI, if you make a less than 20% down payment.

This will lower your mortgage payments. If unable to make more than 20% payment upfront, conventional loans are also available with as little as 3% down payment, under certain conditions. The minimum FICO score for first-time buyers to qualify for conventional loans is 620. You need to know that conventional loans are available as conforming or non-conforming loans.

Jumbo loans

A jumbo loan is a type of non-conforming loan that carries higher loan amounts, unlike conventional loans. They also require a higher credit score. Research shows that to qualify for jumbo loans, the credit required to purchase a home is 700 or higher.

Lenders require borrowers to have such a strong credit score because there is more risk involved with jumbo loans (requirements for such loans will be higher because jumbo and conventional loans are not protected by government insurance).

The good news is with a FICO score of 700 or higher, you qualify for best interest rates. Lenders will consider you for higher value homes that qualify for jumbo mortgage loans at this credit level.

USDA loans

USDA loans are primarily meant for moderate and low-income home buyers. Insured by the Department of Agriculture, these loans are for home buyers looking to buy a home vs. a house in the rural area. There is no minimum set by the government agency. But private lenders will require a credit score of 620 or higher to qualify for streamlined credit analysis.

What homes qualify for USDA loans? To know if a home qualifies for USDA loans, visit the USDA property eligibility site. Select a program and type an address to see if it qualifies.

Is a USDA loan a good idea? A USDA loan is an excellent idea for home buyers with low or moderate-income. The loan allows borrowers to buy a house with no money down.

VA loans

VA loans are a mortgage loan guaranteed by the US Department of Veteran Affairs. Provided by private lenders such as mortgage companies, borrowers must have a minimum credit score of 620 to qualify. This type of loan is specifically designed for the military community and their spouses. Borrowers do not have to make a downpayment.

How do I know if I qualify for a VA Loan? To be eligible for a VA loan, you must have served 90 consecutive days of active service during wartime. Alternatively, you must have served 181 days of active service during peacetime.

How much VA loan do I qualify? At the lender’s office, a loan officer will calculate the maximum amount you can borrow. The officer will consider your gross monthly income multiplied by .41%. If your gross monthly income is $7000, your loan cannot exceed 41% of $7000 or $2870.

What are the best ways to improve a credit score?

Several factors impact your credit score. They include:

  • Credit history
  • Amount of debt
  • Credit Utilization
  • Credit age
  • Length of credit history
  • Payment history
  • New credit

Now that you know the factors that affect your credit score, let’s look at ways to improve your credit score. Be aware, there are no quick fixes. Also, it takes time to repair a bad credit score.

Before you take any step to improve your scores, check your credit score online. By reviewing your scores online, you can learn how you look to a lender and what needs improving. Here are six ways to improve your credit score.

  • Pay off your debts
  • Keep your credit card balances low
  • Never close unused credit cards
  • Avoid applying for too much new credit
  • Pay your bills on time
  • Use credit monitoring to track your credit score changes

Improving your credit score is crucial, especially if you plan to apply for a home mortgage loan. The more you take control of your own credit, the higher the chances of qualifying for best interests and terms on mortgage loans. Remember, an excellent credit score opens doors for you, and being aware of your scores will fast track your dream of homeownership.

Best of luck!

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I use data and technology to help Millennials navigate the ins-and-outs of buying or selling a home in today's market. From appraisals to mortgages to zoning, I cover it all with the goal to teach others. Connect with me on social via the icons above.

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