What Credit Score is Needed to Buy a House?

Many people who want to buy a house are concerned about credit scores and mortgages. If you don’t plan to pay the entire sum upfront, you should be aware of what credit score you need. It is undoubtedly one of the most important factors that your potential lenders will assess, but the exact requirements can vary.

What is a good credit score to buy a house? In this article, you will also learn what role credit score plays and some tips on how you can improve it.

Why Is a Credit Score So Important?

Before we discuss what credit score is needed to buy a house, let’s first understand some fundamental concepts. To put it simply, a credit score is a number calculated based on the analysis of your credit history, and it reflects your creditworthiness. Your score is influenced by several elements, such as the punctuality of your payments, your overall debt levels, and the duration of your credit history.

When you seek a mortgage loan, a lender evaluates factors including your employment history, income, debt, the size of your down payment, and your score. While the last one is just one of the factors considered, it is also a highly important one. Having a higher rating means that you will have a chance to get a lower interest rate and reasonable monthly payments.

Minimum Credit Score to Buy a House by Loan Types

As we continue to explore what credit score is needed to buy a home, it’s crucial to recognize that the minimum score varies based on the specific loan type. If you have an excellent score, you don’t need to worry, but if the situation is different, you need to know approximate qualifying numbers.

Conventional Loans

The defining characteristic of these types of loans is that they are provided by loan associations and commercial banks. Possessing a high credit score greatly enhances your likelihood of getting a conventional loan. Still, even if you have 620 points, you can apply and get a mortgage if you qualify according to other parameters. This may include making a significant down payment or earning a higher income.

FHA Loans

Loans from the Federal Housing Administration are particularly suited for applicants with lower scores. Qualifying for a loan with a credit score as low as 500 is possible if you can put down 10%. On the other hand, a smaller down payment of 3.5% requires you to have at least 580 points.

VA Loans

This type of loan is offered to veterans and their families, as the U.S. Department of Veterans Affairs backs it. Although the minimum requirement is not set, numerous lenders require at least 620.

USDA Loans

If you are interested in purchasing a house in a rural area, you may be interested in a loan offered by The U.S. Department of Agriculture. The way it works is that there are specific rural areas where borrowers with low to moderate income can purchase their homes. Typically, the credit score to buy a house with a USDA loan is 640. However, if your score is lower, you might still qualify if other aspects of your financial profile demonstrate your creditworthiness.

Best Strategies to Improve Your Credit Score

Now that you know the answer to “What credit score do you need to buy a house?” you may be interested in improving your rating if you are not satisfied with it. Luckily, there are multiple strategies to enhance your situation. Here are some valuable tips to consider.

Make sure your report is error-free

Your credit report is the foundation for your credit score, so if it contains any mistakes, this will be directly reflected in how high of a number you get. You have the option to access free reports from the three main bureaus—TransUnion, Equifax, and Experian. If you notice that some information is missing or is even wrong, you can dispute it by providing the right documents.

Always pay your bills on time

The best thing you can do is pay your bills on time without fail. Up to 35 percent of a score is determined by your payment history, so you can imagine how important it is. If you forget to pay bills on time, consider setting up automatic payments or establishing monthly reminders.

Make sure your credit utilization is low

High credit utilization negatively affects your score. The way it is calculated is that if you have a $10,000 credit line and you have $5,000 in debt, it means that your credit utilization is currently 50 percent. This is viewed as a high credit utilization ratio and can lower your credit score. Maintain your credit utilization at 30 percent or below.

Avoid closing credit lines once they are paid off

If you decide to pay off your credit lines and close an account you don’t use before applying for a mortgage, you will be unpleasantly surprised that your score has dropped. While it may seem counterintuitive, it is better to postpone closing old credit lines to avoid lowering your points.

Consider using a secured credit card

For those with a low score looking for a starting point, obtaining a secured credit card could be beneficial. You’ll need to make a cash deposit that will establish your credit limit. It’s essential to select a card that reports to the three major credit bureaus. After acquiring the card, maintaining timely payments is key to enhancing your rating.

Final Thought

In summary, the credit score needed to buy a house varies based on the type of mortgage and additional considerations. It’s important to note that achieving a mortgage does not always require 740 or above. Still, credit scores and mortgage opportunities are connected, and you should strive to get a better score. By paying your bills on time and implementing other improvement tactics, you can enhance your score. This improvement not only helps secure lower interest rates but also leads to better terms on your loan.