Chapter 04: What Credit Score Is Needed to Buy a House?

Buying a house is undoubtedly one of the most exciting milestones! But, previous homeowners know and future homeowners soon find out that there’s a ton that goes into the process. 

Before even beginning your dream home search, it’s important to have a firm understanding of the state of your financial health. 

For those who plan on taking out a loan, it’s especially important to know what your credit score looks like to determine if you can qualify for a loan and how to get the lowest mortgage rate. Aside from debt, income, and savings, lenders look to your credit score as the main determinant for low rates.

This is Chapter 4 of our home buying series, where we’ll be discussing the basics of what a credit score is and what credit score is needed to buy a house. 

In the previous chapters, we went over how to save for a house and resources to use as a first time home buyer, both of which are important to know before you embark on your home buying journey. But you also need to understand your credit score, as that plays a big role in your eligibility to get a loan.

If you’re already confused, fear not. We’ll explain! Before we dive into answering the important question of “What is a good credit score to buy a house?”, let’s back up and take a look at the basics so you feel ready to make an offer on the house of your dreams. Read on to learn what credit score is needed to buy a house or use the links below to skip to any section in the article. 

What Credit Score Is Needed to Buy a House?

The credit score needed to buy a house varies.

If you’re not planning on putting any money down or paying cash upfront, then you’ll be taking out a pretty substantial loan for your new home. To determine if you qualify for a loan, consider using a free credit score check, as credit score is one of the most important factors that lenders look at when determining mortgage lending decisions. In fact, just a small difference in credit scores could mean tens of thousands of dollars more over the term of your loan.

Checking your credit score often is important so that you can have a better understanding of your current credit position. It also can help you be more aware of what lenders will see and if you need to increase your credit score. You need to have a certain credit score for a mortgage because your credit score essentially tells a lender how likely you are to repay a loan. 

There are many effects of bad credit, one of which being that your loan applications might not be approved. Your credit score can also impact whether or not you can get pre-approved or pre-qualified for a loan, both of which are important when buying a home. The difference between pre-qualified vs. pre-approved is basically that pre-qualifying gives you a loan amount estimate, and pre-approval is an assessment of your financial situation and can be used to negotiate an offer.

Still confused? Let’s back up even more.

What Is a Home Mortgage Loan?

A home mortgage loan is used to finance the purchase of a house or real estate. It makes homeownership more accessible since the entirety of the house doesn’t have to be paid upfront. Home mortgage loans are typically the largest loans you’ll ever take out, but also typically have lower interest rates than other types of loans. 

Because they’re such large amounts, they have multiple moving parts and can typically last anywhere from 10 to 30 years. These loans are paid back in monthly payments with interest, a principal, and many other costs like property taxes, hazard insurance, or private mortgage insurance (PMI).

Home loans usually include:

Because these loans have much longer terms, it’s important to keep in mind how much debt you want to take on when applying. Weigh your current situation with your future plans to assess if taking out a substantial loan is feasible for your situation.

What Is the Minimum Credit Score Required for a Mortgage Loan?

You may be wondering: “What is the lowest credit score to buy a house?”, but the answer varies depending on the type of loan you choose.

Many first time home buyers are worried they won’t qualify for a loan, but that’s certainly not the case. Federal Housing Administration (FHA) loans have rather low requirements. Borrowers should have at least a credit score of 500 with a 10 percent down payment. However, this doesn’t guarantee the lender will accept. Many lenders are more prone to approve a credit score in the 500 to 600 range, so 600 might be a more realistic minimum. If your credit score falls below the 600 mark, consider attempting to raise your credit score before applying for a loan. 

The credit score you start with will most likely not be the deciding factor of whether or not you qualify for a loan, so if your score isn’t where you want it to be, don’t panic. 

There are many ways you can raise your credit score quickly. The average credit score in the U.S. is 716 for the FICO score, so it’s helpful to see how yours compares. You may also have different credit scores that are based on the various credit score models, but knowing what your scores are can help you have a better idea of your financial health.

What Interest Rate Can I Get With My Credit Score?

Let’s say you get approved with a credit score on the lower end of the spectrum. Still, this doesn’t guarantee you’ll receive the deal you’re hoping for. Credit scores greatly affect the amount of interest you’ll pay. 

A higher credit score often allows you to get a lower interest rate on your mortgage and this could save you a lot of money in the long-term. 

Quick Tips for Improving Your Credit Score

If you’re not happy with your current credit score and wish to improve it before setting out to buy a home, there are a few options you can consider. Just remember, fixing your credit score takes time and commitment. With that being said, here are some methods for boosting your credit score:

• Make your credit card payments. It’s important to pay off your credit card bill on time each month. Setting up payment reminders or automatic payments can help keep you on track here.
• Reduce your debt. Strive to pay down existing debts if you can. Many lenders look for a debt-to-income ratio to be below the 30 percent mark, meaning you’re not spending more than a third of your income servicing debt each month. Paying off loans will lower your debt-to-income ratio, which can make you a more desirable candidate to lenders. It’s also crucial that you know your debt-to-credit ratio, which is the amount of debt you owe compared to your available credit. A low debt-to-credit ratio can help boost your credit score and show lenders that you are trustworthy when  it comes to repayment.
• Review your credit report. Look this over diligently. Sometimes people find inaccurate information or missing information on their credit report. If possible, dispute any misinformation on your report.

Build Credit to Buy the House You Want

Once you’ve set out on the journey of purchasing a home, it’s important to get organized and collect all the information you can to assess your financial health first.  Mint offers a free credit score check that will help you determine where you stand in front of lenders. If your credit score isn’t where it needs to be, you may want to take a step back and consider making a plan to improve the number before applying for a home mortgage. You can also use the app to set savings goals, manage your budget, and keep your financial health in check at a glance.

So now that we’ve answered the question of “What credit score do you need to buy a house?” you should feel a little bit more prepared with your home buying journey. To learn more about first time home buying resources and the steps to buy a house, continue reading the series. The next chapter in the series, Chapter 5, will cover what proof of income is.

Sources: FICO

Source: mint.intuit.com