The 2023 Answer: What Credit Score Is Needed to Buy a House?

Credit Score Needed To Buy A House (By Loan Type)

Subtitle: Conventional Loan Requirements (620)

When applying for a conventional loan, lenders typically require a minimum credit score of 620.

However, only when your credit score has reached 740 or above, there’s a more significant possibility that you can get the best interest rates and terms. Government agencies aren't the sponsors of conventional loans. No government agency provides traditional loans. People can apply for a conventional loan from private lenders like banks and mortgage companies.

FHA Loan Requirements (580)

FHA loans, insured by the Federal Housing Administration, are designed for borrowers with lower credit scores and limited funds for a down payment.

If the borrower wants to choose an FHA loan and the borrower's credit score reaches the lowest level-580, the borrower needs to make a 3.5% down payment as a guarantee. Moreover, borrowers whose credit scores are between 500-579 are also eligible to apply for an FHA loan, but the down payment ratio will be 10%.

VA Loan Requirements (580)

VA loans are offered to eligible veterans, active-duty military personnel, and their families. These loans are backed by the Department of Veterans Affairs, which allows lenders to offer more favorable terms.

Even the minimum credit score requirement of VA doesn’t explicitly set. A credit score of 580 is the lowest limit most lenders can accept. But there are exceptional circumstances. If you can prove your ability to pay, which is usually your income, the lenders will offer you a loan even for a credit score fails to reach 580.

USDA Loan Requirements (640)

USDA loans are designed for low-to-moderate-income borrowers looking to purchase a home in a designated rural area. The United States Department of Agriculture backs these loans.

There are two must-haves to apply for a USDA loan:

• a minimum credit score of 640;
• an income below 115% of the region's median income.

How Lenders Determine Your Credit Score?

How Your Credit Score Is Calculated

Credit scores are determined by evaluating several factors in your credit history, including your payment history, the amount of debt you owe, the length of your credit history, the types of credit you have, and recent credit inquiries. Each factor is assigned a specific weight, which is then used to calculate your credit score.

When you're applying for a loan on your own, lenders will use your individual credit score to evaluate your creditworthiness.

How Credit Scores Are Calculated with a Cosigner:

When you apply for a loan with a cosigner, the lender will consider your overall creditworthiness. This requires your credit score and that of your consigner. The following are instructions for calculating the credit score for a mortgage application with a consigner:

Individual credit scores: Suppose your credit score is 680 and your cosigner is 750.

Average credit scores: Lenders will then calculate the average credit score of both borrowers. In this case, the average score would be (680 + 750) / 2 = 715.

Using the average credit score: The lender will use the average credit score of 715 to assess your joint creditworthiness and determine the mortgage terms.

As we discussed, a conventional loan needs a credit score of 620. Almost the average score here determines whether the loan application will be approved.

FICO® Score Vs. Credit Score

While "credit score" is often used to describe a single number, many models exist for calculating credit scores. The FICO® Score is one of the most widely used models developed by the Fair Isaac Corporation. Lenders frequently use FICO® Scores to assess borrowers' credit risk when considering mortgage applications.

FICO® Scores range from 300 to 850 and are calculated using the same factors as other credit scores but with specific weightings unique to the FICO® model.

When you apply for a loan, lenders will use many different scoring models to evaluate your credit. Your FICO® Score is just one of the credit scores considered. However, its widespread use makes it a key factor for obtaining advantageous mortgage terms.

How to Check Your Credit Score?

Checking your credit score is essential in maintaining your financial well-being and ensuring you're well-prepared for any loan or mortgage application. Here are several ways to check your credit score:

1. Online Credit Monitoring Services:

Many websites offer free credit score checks, such as Credit Karma, Credit Sesame, and WalletHub. You could learn your VantageScore through these services. Even if your VantageScore and your FICO® are different, VantageScore can also indicate your credit health.

2. Credit Card Companies

Some credit card issuers provide customers free access to their FICO® Score or VantageScore.

There are three ways for you to nd this information:

a. looking at your credit card statements.

b. logging on to your online account.

c. contacting customer service.

3. Credit Bureaus

The three major credit bureaus—Equifax, Experian, and TransUnion—each maintain credit reports and scores. By law, you're entitled to one free credit report from each bureau every 12 months through AnnualCreditReport.com. This report will not show your credit score directly, but you can buy the score separately from each bureau.

4. Loan Statements

If you have an existing loan, such as a mortgage or car loan, your lender may include your credit score on your monthly statements or in your online account.

5. Financial Institutions

You can access your credit scores freely through services offered by banks and credit unions. Ask your financial institutions to check it.

Can You Get a Mortgage With a Bad Credit Score?

Yes.However, even if you can get a mortgage with a bad credit score doesn't mean it's beneficial. Less favorable terms like higher interest rates and extra funds might come with the mortgage obtained with bad credit. This phenomenon will ultimately lead to higher costs of homeownership.

Additionally, lenders may require a larger down payment or impose stricter loan conditions, making it more challenging to secure a mortgage.

Tips for Getting a Mortgage With a Bad Credit Score

If you're looking to buy a home with bad credit, consider the following strategies to improve your chances of getting approved for a mortgage:

1. Consider applying for an FHA loan: Compared to traditional loans, these loans supported by the government may require less for the borrower’s credit score.

2. Make a large down payment: A larger down payment reduces the lender's risk and may make them more willing to approve your mortgage application.

3. Get pre-approved by multiple lenders: By seeking pre-approval from numerous lenders, you can compare loan offers and potentially find a lender more willing to work with borrowers with bad credit.

4. Work with a mortgage broker: Mortgage brokers have access to various loan programs and lenders and may be able to find a specialized loan program tailored to your financial situation.

5. Pay off large credit card balances: Reducing your credit utilization ratio by paying down high balances can help improve your credit score.

6. Reduce your debt-to-income (DTI) ratio: The lenders tend to approve borrowers' applications with a low DTI ratio. Paying off other debts, such as a car or student loans, can help you improve your credit quality.

7. Consider a co-signer: Asking someone with excellent or exceptional credit to co-sign your mortgage application can improve your chances of approval. However, the co-signer will share responsibility for the loan, so it's essential to ensure that both parties understand the risks involved.

While there's no guarantee that these actions will secure a favorable mortgage, they can increase your approval odds and help you on your path to homeownership.

How To Increase Your Credit Score Before Buying A House？

Improving your credit score is something you should do before you apply for a loan. It also contributes to your financial health and future loan needs. Here are some practical tips for increasing your credit score before buying a house:

Pay Your Bills on Time.

A consistent history of on-time payments is crucial for a strong credit score. Set up automatic payments or calendar reminders to ensure you never miss a due date.

Use no more than 30% of your credit utilization ratio

Aim to use at most 30% of your available credit on each credit card. Paying down balances and keeping them low can positively impact your credit score.

Keep Old Accounts Open.

The length of your credit history plays a role in your credit score.You’d better open the old account to have a more extended credit history. Only close it with a convincing reason, like high fees or inactivity.

Limit New Credit Inquiries.

Each time you apply for new credit, a hard inquiry is added to your credit report, which can temporarily lower your credit score. Avoid using new credit cards or loans in the months leading up to your mortgage application.

Diversify Your Credit Mix.

Lenders like to see various credit types in their credit portfolio, such as credit cards, installment loans, and retail accounts.You can also manage different types of credit conscientiously to improve your credit score.

Set Up Payment Reminders.

Late payments can be harmful to your credit score for sure. You should set reminders or use automatic repayment to avoid missing payments.

Be Patient and Consistent.

Improving your credit score takes time and consistent effort. Focus on responsible financial behaviors and regularly monitor your credit to track your progress.

How to Prepare Your Credit for a Mortgage?

1. Check Your Credit Score and Reports

Begin by reviewing your credit score and reports from the three major credit bureaus—Equifax, Experian, and TransUnion. With the help of this, you will have access to a clear picture of your credit status and identify areas that can still be improved. If any inaccuracies will damage your credit score, you can’t be too careful when checking for any errors. If you find something wrong, you should dispute them promptly.

2. Meet Your Liabilities

Reducing your debt can help improve your credit score and make you a more attractive candidate to mortgage lenders.You should prioritize high-interest debts, such as credit cards. This can help lower your credit utilization ratio, as well as your debt-to-income ratio. It also proves that you can manage your monthly payments well, giving you a better chance of getting a loan.

3. Avoid Applying for New Credit

In the months leading up to your mortgage application, refrain from applying for new credit cards, loans, or other forms of credit. A hard inquiry is required every time you apply for new credit, which will lower your credit score temporarily. Moreover, lenders may think a borrower with various credit inquiries needs help paying the mortgage. This may reduce the approval rate of your application.

4. Be Patient to Improve Your Credit Score

If your credit score is significantly lower than the recommended score for the mortgage you're seeking, it may be worth waiting to improve your credit before applying.Many ways can help you make responsible financial habits, such as avoiding missing payments, reducing your utilization ratio, and making your credit portfolio diverse. When you are ready to buy a house, doing these things patiently and consistently can raise your credit score. It also can make you able to apply for more favorable mortgage terms.

Other Considerations When Buying A House

Debt-To-Income Ratio

Debt-to-income (DTI) ratio is calculated by dividing your total monthly debt payments by your gross monthly income.Targeting a DTI of 50% or lower is beneficial, which means your financial situation is healthy. Lenders may be impressed by this.

Example: Suppose your gross monthly income is $5,000, and your total monthly debt payments are as follows:

Mortgage payment (principal, interest, taxes, and insurance): $2,000

Car loan payment: $300

Student loan payment: $300

Credit card minimum payments: $200

Your total monthly debt payments equal $2,000.

To calculate your DTI ratio, divide your total monthly debt payments ($2,000) by your gross monthly income ($5,000):

DTI = ($2,000 / $5,000) * 100% = 40%

In this example, your DTI ratio is 40%.

Loan-To-Value Ratio

LTV Ratio = Loan Amount divided by House Purchase Price.

This ratio reveals the relationship between the loan amount and the assessed value of the purchased property. Therefore, lenders can use this ratio to estimate the loan approval risk.

Loan-To-Value Ratio Example:

Suppose you want to buy a home appraised at $300,000 and plan to make a down payment of $60,000. The loan amount you're seeking would be $240,000 ($300,000 - $60,000).

To calculate the LTV ratio, divide the loan amount by the appraised value of the property:

LTV = (Loan Amount / Appraised Value) * 100

LTV = ($240,000 / $300,000) * 100

LTV = 0.8 * 100

LTV = 80%

In this example, your LTV ratio is 80%, indicating that you have 20% equity in the property.

Different lenders have different requirements for LTV. You’d better control your ratio within 80% or less to get a better loan. A lower LTV ratio indicates that you have a larger down payment or more equity in the property, which reduces the lender's risk.

An LTV at or below 80% means a more favorable borrowing profile. It can help you have more chances to get better loan terms, like lower interest rates.

If your LTV exceeds 80%, the lenders will undertake a significant part of the home loan and take considerable risks to lend to you. This leads you to pay for private mortgage insurance (PMI) or another form.

Income And Assets

Lenders will evaluate your income and assets to ensure you can comfortably afford the monthly mortgage payments.You should submit two years of proof of income and assets to lenders. Moreover, some documentation, such as pay stubs, tax returns, and bank statements, is required. These documents can verify your income and help make your mortgage approval easier.

Down Payment

The size of your down payment can significantly impact your mortgage eligibility and loan terms. A larger down payment tends to result in a lower interest rate and a more favorable monthly mortgage payment. Moreover, the need for private mortgage insurance (PMI) may be canceled.

Interest Rates

Mortgage interest rates play a crucial role in determining the overall cost of your home loan. Monitor current market trends and consider locking in an interest rate when favorable. You should also note that many factors, like your credit score, loan term, and loan type, influence your loan rate. Therefore, keep improving your score, and find the suitable mortgage options that meet your needs.

FAQs about Credit Scores for Buying a House

Q: How Much House Can I Afford?

A: To determine how much house you can afford, consider your income, monthly expenses, debt, and down payment amount. Generally, you should not apply more than 28% of your gross monthly income to your mortgage payment (including principal, interest, taxes, and insurance).

Q: How Much Should I Save for a Down Payment?

A: A down payment of 20% of the home's purchase price is recommended to avoid private mortgage insurance (PMI). However, lower down payment options may be available depending on the loan type, such as 3.5% for FHA loans or even 0% for VA and USDA loans.

Q: Is Getting a Mortgage Loan With a Bad Credit Score Possible?

A: You can buy a house with a low credit score. However, your loan options may be limited, and the terms may need to be more favorable. FHA loans, for example, have lower credit score requirements, and VA or USDA loans may also be options for eligible borrowers.To get better loan terms, your credit score should be improved before sending your application for a mortgage.

Q: Where Does Being Prequalified Differ From Being Preapproved for a Mortgage?

A: Prequalification is an initial assessment by a lender based on your self-reported financial information, giving you a rough estimate of the loan amount you may qualify for. However, when preapproval begins, lenders will more deeply verify your financial circumstances and creditworthiness to make a qualified commitment for a specific loan amount.