You’re finally ready to take a huge leap of faith into the next big chapter of your life: homeownership. With all of the excitement and anxiety that comes with the territory, there are also a number of important steps to take and checkboxes to tick off before you can even think about jumping into the housing market.
If you’re like most people, buying a home is among one of the most expensive investments you’ll make in your lifetime. Such a monumental purchase requires plenty of time and preparation. One of the most important preparation steps is building and maintaining a stellar credit score.
Having a healthy credit score is the key to paving a way toward the life you’ve always dreamed of. With a good credit score, getting approved for everything from a car loan to a mortgage is made easy. Even though everyone has a credit score, it can be a bit confusing trying to dissect what your credit score says about you, how it’s calculated, and how it applies to your homebuying capital. Using this guide, we’ll walk you through everything you need to know about credit score to buy a house.
- What is a credit score?
- What credit score is needed to buy a house?
- How can I prepare my credit score to buy a house?
What is a credit score?
A credit score is a number that represents a person’s creditworthiness. This number ranges between 300-850— the higher the number, the better the score, and ultimately the better the credit score, the more reliable a borrower appears to potential lenders.
The credit score calculation is based on credit history. Credit history is the aggregate evaluation of overall debt rates, number of open accounts, and repayment history. Lenders use credit scores to assess the probability and risk of a borrower’s ability to repay their mortgage in a timely fashion.
Although exact scoring models may vary slightly by lender, most use FICO Score calculation standards as a basis. FICO uses data from three major credit bureau companies—Equifax, Experian, and TransUnion—to measure individual credit scores.
From this information, they compose a total score based on the following five factors:
- Payment history – 35%
- Amount owed – 30%
- Length of credit history – 15%
- Types of credit – 10%
- New credit – 10%)
Once you’ve had your credit score evaluated with a free credit check, take a look at the table below to see how your score measures up in the eyes of your future potential lender.
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Do keep in mind that as frequently as your financial situation changes, your credit score fluctuates with it. Your credit score from a couple months ago is likely different from the score you may earn today.
What credit score is needed to buy a house?
As mentioned before, your credit score plays a significant deciding factor in your home buying potential. The healthier your credit, the more options you’ll have available to you. The minimum credit score needed to buy a house varies by loan type, location, and lender. Generally speaking, a credit score at or above 670 is great enough to grant you access to favorable interest rates on a mortgage.
In need of a more in-depth look at the credit scores needed for each type of loan? We’ve got you covered.
- Conventional loans: Conventional home loans are not insured by a government agency and adhere to the standards set by Fannie Mae and Freddie Mac. Conventional mortgages typically require a minimum credit score of 620, however, in order to score the most competitive interest rates, you’ll need a credit score at or above 740.
- FHA loans: Insured by the Federal Housing Administration, FHA mortgage loans are designed to cater to low-to-moderate-income borrowers. The minimum credit score needed to qualify for an FHA loan is 500 if you are able to make a 10% down payment or 580 if you’re able to put down 3.5%.
- VA loans: Distributed by the U.S. Department of Veterans Affairs, VA loans are available to active-duty military members, veterans, their spouses, and other eligible beneficiaries. Although VA loans do not demand a minimum credit score requirement, VA loan lenders may require that you have a score of at least 620.
- USDA loans: USDA mortgage loans are insured by the U.S. Department of Agriculture and intended for low-to-moderate-income borrowers looking to purchase a home in a rural location. The USDA requires a minimum credit score of 580 for its loans, but there is a bit of wiggle room to work with if your score is a little lower under certain circumstances.
How can I prepare my credit score to buy a house?
If you are exploring your options and seriously thinking about buying a home, it may be worth dedicating some time to prepping and boosting your credit score before you dive into the market. Whether you have a poor credit score and you’re looking to reach a 620 baseline score or you already have good credit but want to qualify for prime interest rates and term conditions, use these tips to get started.
Pay off your debts
It should come to no surprise that paying off your debts is among the most foolproof ways to boost your credit score. Doing so allows you to improve balance out your debt-to-income ratio, which is an incredibly crucial factor mortgage lenders weigh when deciding whether or not to approve you.
If you have credit card debt, do what you can to settle that outstanding balance. Your credit utilization rate, which measures the amount of revolving credit you have compared with the total amount of credit you have available, is an important calculation lenders account for during the application process. Although there is no standard credit utilization rate mortgage lenders look for, 30% or less will set you up for success. Ultimately, the lower your rate, the better.
Avoid applying for new credit
No matter which lender you choose, they are bound to conduct a hard inquiry into your credit record nearly each and every time you apply for a mortgage. In the vast majority of cases, you’ll see your credit score decrease by five points or less, after just a single hard inquiry.
If you choose to have several inquiries completed within a short period of time, you’ll likely bear the brunt of a compounding effect that lowers your credit score even more.
Pay your bills on time
Payment history is the most important element of your credit score evaluation. Making late payments on utility bills, rent, or student loans can significantly impact your score and quickly turn a very good score into a fair score.
Fortunately, paying your bills on time is something you can automate amidst the digital age. Where possible, set up auto-payments so you never fall behind on your bill payments again.
If you’re struggling with a poor credit score or a score a bit lower than on you desire, it may be a smart idea to simply pause your home buying venture. Because your credit score has such a consequential impact on your ability to obtain a manageable mortgage, it’s likely in your best interest to wait and build your credit score rather than rush into a mortgage that features unattractive terms and rates.
In the event that your credit report includes any number of outstanding highlights, such as a repossession or bankruptcy, it may take a considerable amount of time and rebuilding for your credit score to recover from these types of damaging financial factors.
Although placing your homebuying plans on pause may not be a part of your plan, it may make the most financial sense for your situation. Refocus on getting your credit back on track so you can dive into the market with confidence when your score is whipped into shape.
Your credit score determines a great deal about your future financial leverage. In order to get the best terms, conditions, and interest rates on a mortgage, you’ll need a categorically good credit score of at least 670 to pursue your dreams of buying a house. Using these tips, you’ll be able to step into the market with the knowledge and credit confidence you need.