Your credit score is an important factor in whether you can get approved for a home loan, and it also helps determine your interest rate. But what credit score is needed to buy a house? The answer depends on what type of mortgage you’re interested in.
Keep reading to find out the minimum credit score needed to qualify for a mortgage, other loan approval requirements.
Credit Score Needed to Buy Home
Even though lenders look at other factors such as your debt, income and savings, the single biggest factor for being approved or denied for a mortgage is your credit score.
Qualifying minimums start at 500 for some loan programs, but to have access to more flexible home mortgage options, you may need a credit score of at least 680. To get the best financing rates, especially on a conventional loan, you may want to shoot for a score of 740 or more.
What Type of Mortgage Loans Are Available?
A variety of different mortgage loans are available, including government-backed and conventional loans. Here’s a look at each type:
1. FHA loan
FHA loans are insured by the Federal Housing Administration and require a lower down payment and credit score requirements than a typical conventional loan. These loans are designed for low-to-moderate income borrowers who might have less-than-perfect credit.
Check out the difference between an FHA loan and a USDA loan:
2. USDA loan
USDA loans, guaranteed by the U.S. Department of Agriculture, are designed for low-income buyers interested in owning properties in rural areas. Typically, qualified borrowers can secure a loan with little to no money down as long as the property is USDA eligible.
Here’s a video detailing 2019 USDA Mortgage Updates, including information on loan requirements:
3. VA loan
VA loans are available to service members, veterans and eligible surviving spouses via a U.S. Department of Veterans Affairs mortgage. Up to 100% financing on the value of a home is available. Other possible benefits include competitive interest rates, no down payment and no private mortgage insurance.
4. FHA 203(k) loan
An FHA 203(k) loan — aka an FHA Construction Loan — is a dual-purpose, government-insured mortgage loan. This loan is designed for low-to-moderate income families who are interested in buying homes that are need of repairs and covers both the home purchase and needed renovations.
5. Conventional loan
Conventional loans are loans that are not backed by the federal government. They are designed for borrowers who have stable employment and income, as well as good credit. Some lenders offer conventional loans with low down payments and no private mortgage insurance.
What Is the Minimum Credit Score Required?
The typical minimum credit scores vary by the type of mortgage you apply for. Here’s information for the minimum credit score required for different mortgage loans:
1. FHA loan
You’ll need a minimum credit score of 580 and a 3.5% down payment to borrow up to 96.5% of the value of a home with this type of loan. Although less likely, people with credit scores as low as 500 can qualify with a 10% down payment.
2. VA loan
A minimum credit score of at least 580, but often 620 or more, is usually required by lenders to qualify for a VA loan. For applicants with credit scores lower than 580, approval may be possible if certain conditions are met, such as:
- No or limited collections debt
- Low debt-to-income ratio
- More than five years with current employer
- No late payments within the last year
- No late mortgage payments within the past three years
3. USDA loan
Borrowers who have a credit score of 680 or more are eligible for a streamlined loan approval process. And although lenders often require a 640 minimum credit score to approve this type of loan, the USDA doesn’t prohibit lenders from approving borrowers with lower scores in certain situations.
For example, borrowers who suffered extenuating circumstances, such as layoffs, medical emergencies or other uncontrollable events (not caused by mismanagement of finances) could be approved for a USDA loan.
4. FHA 203(k) Loan
A minimum credit score of 640 and 3.5% down payment is required to qualify for an FHA 203(k) loan. Borrowers must also meet other FHA requirements for approval, such as:
- Have a verifiable employment history
- No late payments within the past year
- No bankruptcies or foreclosures within the past three years
5. Conventional Loan
Conventional loans, which are backed by Freddie Mae or Fannie Mae, have a minimum credit score requirement of 620. A credit score of 620 might be due to high credit card balances and occasional late payments, which may prompt lenders to ask loan applicants additional information, such as detailed documentation of income and assets.
How Your Credit Score Affects Interest Rates
Mortgage lenders use a risk-based pricing table, which includes credit scores and loan-to-value ratios, to determine the interest rate on your home loan. The lower your credit score, the more you may have to pay in interest.
Here’s an idea of how much more you might pay in interest depending on your credit score:
- People with credit scores of 579 and lower may be subject to an interest rate as much as 2% higher than the lowest rates available.
- People with scores from 580 to 619 may be offered an interest rate up to 1% higher than the lowest available rate.
- People with scores from 620 to 679 may be offered an interest rate that’s 0.5% higher than the best rates.
- People with scores 740 and above may qualify for the best rates available.
What Else Besides a Good Credit Score Do You Need to Buy a Home?
Although your credit score is at the core of a home loan approval, lenders do consider other factors as well. Here’s a look at what you may need to provide:
- Employment history information
- Pay stubs
- Bank statements
Can You Get a Mortgage With Bad Credit?
If you have bad credit, it’s still possible to get a mortgage. The interest rate a lender is willing to offer, however, may be steep due to your increased risk as a borrower. Due to its less stringent requirements, an FHA loan may be a good option if your credit score is in the lower range.
You can also try putting down a larger down payment, writing a letter of explanation for the actions that led to your low credit score or setting aside extra cash to persuade your lender to consider you for a mortgage loan.
If you’ve experienced bankruptcy or foreclosure, you’ll have to wait for a predetermined amount of time before applying for a loan. Waiting periods following a bankruptcy are typically two to four years — and three to seven years following a foreclosure.
Can You Get a Mortgage With a Cosigner?
If your credit score is on the low side, you may want to consider asking a family member with good credit to cosign your mortgage. A cosigner can help strengthen your loan application, which could lead to an approval that you couldn’t get on your own.
If you ask someone to cosign, make sure he or she understands what it entails. Cosigners are held equally responsible for paying the loan. For example, if you’re late on your payments or allow the loan to go into foreclosure, both your credit and the cosigner’s credit can be severely impacted.
Can You Get a Mortgage With No Credit?
A lender may allow you to have someone cosign if you don’t have any credit history, but a lender is more likely to give you a mortgage if you can show that you can pay your bills on time, every time.
If you can’t get an unsecured credit card, you can apply for a secured card, which requires you to make a deposit equal to your credit limit. Once you have a credit card, make payments in full by the billing due date each month.
You can also ask a family member with good credit to add you as an authorized user on one of their credit cards, which could result in their good credit history to register on your credit report.
Other possibilities for landing a mortgage without credit include providing payment history records for mobile phone, rent or utilities to prove your creditworthiness. You can also try to offer the lender a larger down payment to get the loan approved.
What’s important to check on credit reports?
The first step is to check your credit reports and scores to see where you stand. Here are some important items you want to check:
1. Are there errors?
Look over your credit reports for incorrectly reported information, such as late payments that aren’t valid. Contact the credit bureau listing the error to dispute it and get it corrected.
2. Are your payments on time?
Payment history holds considerable weight in the credit-scoring model and is crucial to a decent score. Plus, many home loan programs don’t allow applicants to have late pays within the past year or so.
3. Are your credit balances low?
Overextending yourself by carrying high balances on your credit cards can increase the possibility of late or missed payments. Plus, the more you have to pay toward credit card bills, the less available cash flow you may have each month.
4. Have you recently applied for credit?
Having more than a couple of credit card accounts can be seen as a path to overspending, so only apply for credit when you really need it.
5. Have you closed any accounts?
Closing accounts can negatively impact your credit utilization ratio, which is the amount of total credit you have relative to the amount you’re using. A higher credit utilization ratio can indicate that you’re having difficulty managing your finances.
Is Your Credit Score Where You Want It?
The credit score to buy a house varies, with better financing options starting at 680 and the possibility of optimal financing with a credit score of 740 or more.
Monitoring your credit reports and scores is a crucial step in initiating improvements. Plus, a better credit score can lead to lower interest rates, which means you’ll pay less over the lifetime of the loan.
If you’re not already monitoring your credit, are you ready to start?