What should your credit score be to buy a house?
The minimum credit score you’ll need will depend on the kind of mortgage you’re looking for, though lenders may have additional criteria that you’ll need to pass in order to be approved. That said, here’s a look at what you can expect: FHA loans If you’re looking for a loan that’s insured by the Federal Housing Administration, you’ll need a minimum score of 500 – though you’ll need to put up a 10% down payment. If you can only put down 3.5%, you’ll need a higher score of 580 to qualify. VA loans Loans that are insured by the US Department of Veterans Affairs don’t have a minimum credit score requirement, though lenders that offer such loans will typically expect a score of at least 620. USDA loans These loans, which are designed for those looking to buy homes in rural areas and are backed by the US Department of Agriculture, typically require a minimum credit score of 640 (lower scores may be approved, but will require manual underwriting). Conventional loans If you’re looking for a traditional mortgage (i.e. one that isn’t backed by a government agency) you can expect a minimum credit score requirement of 620. Jumbo loans If you’re looking for a mortgage that exceeds Freddie Mac and Fannie Mae lending limits, credit scoring criteria will be higher accordingly, with the minimum score needed typically around 700.
Why do credit scores matter?
Credit scores give lenders an instant indication of your credit worthiness, and how risky you are as a borrower. The lower your score, the higher risk you’re deemed to be, which can lead to less favorable mortgage terms and higher interest rates – and subsequently, higher repayments. This means your credit score will not only dictate whether or not you’ll be accepted for a loan, but also how much you’ll be expected to pay each month, which can be a vital consideration when determining the kind of mortgage you can afford (opens in new tab). For example, if you wanted a $240,000 loan over a 30-year term and qualified for a 3.5% mortgage rate, you’d pay $1,077 each month (excluding insurances and property taxes, and after making a 20% down payment), with the amount of interest paid over the term of the mortgage totalling $147,974. Conversely, if you had a lower credit score and only qualified for a 5% interest rate, your monthly payment would increase to $1,288, which would also see the total amount of interest you’d pay over the life of the loan skyrocket to $223,814. This equates to an increase of over $75,000, so having a less-than-perfect score can seriously cost you.
Can I get a mortgage with bad credit?
It depends how low your credit score is. Provided your score is above 500 you may qualify for certain types of loan, though if it’s below this level, you could find it tricky to be accepted, as lenders will be less confident that you’ll be able to repay the loan. That said, there are many factors that will go into a lender’s decision-making process – such as your debt-to-income ratio, cash reserves, income and employment history, together with the amount of down payment you’re offering – but if you’ve got bad credit, it’s always worth trying to improve it before you start the application process.
How can I improve my credit score?
The first thing you’ll want to do is check your report so you know where you stand - you can do this for free at AnnualCreditReport.com (opens in new tab) - and if you notice any errors, you’ll want to dispute them (opens in new tab). However, it may simply be that you need to work on your credit management, in which case you’ll want to focus on paying down your debt to improve your credit utilization ratio, and always pay bills on time to ensure you don’t get any marks on your profile. Try to avoid making any other credit applications in the months before applying for a mortgage, as multiple credit inquiries can have a negative effect on your report, albeit a temporary one. While it’s possible to improve your credit score yourself, you may want to seek the best credit repair services (opens in new tab) to help. Doing so can be one of the best ways to fix your score fast, particularly if you’re not sure why you’ve got bad credit in the first place, as the professionals will be able to look for any anomalies on your report, check for derogatory marks (opens in new tab) and get any errors expunged.
Credit scores and the coronavirus crisis
People’s finances have come under extra scrutiny in the last year as a direct result of the coronavirus pandemic, with lenders becoming increasingly cautious in who they lend to as well. This, combined with the rush in refinancing brought about by favorable mortgage rates, means that the typical credit score among borrowers who qualify for a mortgage has increased (opens in new tab), with the average sitting at a two-decade high of 786 in both the third and fourth quarters of 2020. Yet it’s important to remember that this is just an average; as discussed above, the credit scoring criteria for many mortgage lenders is below this level, though it remains the case that the higher your score, the better your chances of approval – and the better terms you’ll likely qualify for. Whether you’re buying a new home or searching for the best refinance mortgage (opens in new tab), it’s always worth spending the time to make sure your score is the best it can be.
