You’re in line at the shoe store right behind your friend. Your friend approaches the register to pay for their shoes and you hear the clerk say “That’ll be $60.” You’re smiling because you notice that you picked out the exact same shoes as your friend. Now it’s your turn to pay. You pull out your wallet and look up at the clerk who says, “That’ll be $150.”
With a scrunched up face, you say, “Oh, that must be a mistake. I got the same shoes as my friend who just paid $60.” The clerk responds, “No mistake. Your friend has excellent credit, but you have poor credit. That means you pay more for the exact same things.”
This happens every single time people need to take out a mortgage to buy a home. A mortgage means you promise to repay the money you’re borrowing to buy your house, plus an agreed-upon interest rate. But that interest rate can drastically change the total cost of your house, so be careful! Oh, and that interest rate is also determined by your credit score.
Anyway, long story short, your credit score matters A LOT and you want it to be really good before applying for a home loan. But how “good” exactly are we talking here?
The lowest score generally approved is 580 – anything below that makes you a “subprime borrower,” which means you get the worst deals and pay much more in interest! But the actual credit score you should aim for really depends on the type of home loan or mortgage you qualify for:
- Conventional loans are great for people with strong credit scores well above the ones listed so far. These are not provided by the government at all and usually come from private lenders like Fannie Mae. They like to see a minimum of a 640 credit score but may even consider as low as 620 if your other qualifications are impressive. For example, a low debt amount owed and a high income really helps to impress them!
- FHA (Federal Housing Administration) loans require a minimum of 580. But in some rare cases, scores between 500-579 have been approved. (Highly unlikely though.) Instead of getting the hard inquiry, which lowers your score, even more, it’s better to take the time to improve your score first and then come back to that home loan application!
- FHA 203K Home Renovation loan is a bit more selective with a required score 620 or higher. You can read about those here.
- If you’re looking at a home that is in a rural area then you may want to check out the USDA loan, which requires a 640 minimum credit score. You should also know that the USDA’s Rural Development guidelines have household income caps for this program.
- Finally, Veterans Administration Loans generally want nothing lower than a 600 credit score, but technically there’s no minimum credit score required for Veterans as long as they meet other requirements.
If these scores all seem high to you, that’s because after the infamous ’08 housing market crash laws detailing the requirements for the mortgage industry tightened up. So now, it’s much more difficult to qualify for a loan that may have been a lot easier to get approved for prior to ’08 – especially for people with lower credit scores.
Check out this post for more information about how to increase your credit score before you go complete that home loan application!