Financing your house with a mortgage probably means you just signed up to repay hundreds of thousands of dollars. For this reason, lenders wont lend to just any borrower. You can expect a lender to closely review your financial health, including your credit score, before giving the stamp of approval. Heres what credit score is needed to buy a house, plus ways you can help improve your chances of qualifying for a mortgage.
Buying a house for the first time is an exciting milestone. However it can also be intimidating especially when it comes to getting approved for a mortgage. One of the key factors lenders consider is your credit score. So what credit score do you need to buy a house for the first time?
Why Your Credit Score Matters
When you apply for a mortgage, lenders will thoroughly review your credit report and score to assess your creditworthiness. In general, the higher your credit score, the more likely you’ll be approved for a loan.
Your credit score also affects the loan terms and interest rate you’ll be offered. Those with excellent credit scores typically qualify for lower interest rates, saving thousands of dollars over the life of the loan.
So maximizing your score can make a big difference in affordability when buying your first home.
What is Considered a Good Credit Score?
The most commonly used credit scoring model for mortgages is the FICO Score, which ranges from 300 to 850. According to myFICO, here are the credit score ranges and ratings:
- 800-850: Exceptional
- 740-799: Very Good
- 670-739: Good
- 580-669: Fair
- 300-579: Very Poor
In general, a FICO Score above 700 is considered good, and anything above 760 is excellent. However, the minimum credit score requirements vary depending on the mortgage program.
Minimum Credit Scores by Loan Type
While excellent credit unlocks the best rates and terms, it is possible to buy a home with a lower score through government-backed loan programs. Here are some common mortgage types and their minimum credit score requirements:
-
Conventional loans – 620 minimum credit score required, A score of 760+ qualifies you for the very best rates,
-
FHA loans – 500 minimum credit score, but a 580 score is recommended to reduce requirements.
-
VA loans – No set minimum score, but most lenders look for at least 620.
-
USDA loans – No defined minimum score, but often a minimum of 620.
So while you can potentially qualify for an FHA loan starting at 500, it’s ideal to work towards a score of at least 580. The higher your credit score, the better your interest rate will be.
Tips for Improving Your Credit Score
If your credit score needs a boost, here are some tips to improve it before applying for a mortgage:
-
Pay bills on time. Payment history is the biggest factor in your credit score. Set up autopay if needed to avoid late payments.
-
Lower credit utilization Keep credit card balances low compared to limits Ideal is 30% or less,
-
Avoid new credit inquiries. New hard inquiries from applying for credit can impact your score, so hold off on new credit cards.
-
Check for errors. Dispute any inaccuracies you find on your credit report.
-
Increase credit age. Having long-standing accounts improves your score, so avoid closing old credit cards.
With some diligence, it’s possible to improve your credit score significantly within 6-12 months.
How to Check Your Credit Score
There are a few ways to check your credit score for free:
-
Many credit card companies provide free monthly credit scores on their websites or mobile apps.
-
You can get a free credit report including your FICO Score from Experian on their website.
-
Personal finance websites like Credit Karma provide free VantageScores, which are similar to FICO.
Checking your score frequently lets you track your progress as you work to improve it.
Pre-Qualification and Pre-Approval
Before starting your home search, go through the pre-qualification or pre-approval process with a lender. They can assess your credit, income, and debts to determine the mortgage amount you may qualify for.
Pre-qualification uses the information you provide at face value, while pre-approval requires documenting your financials. Pre-approval is stronger when making offers.
Getting pre-qualified or pre-approved also lets you shop for competitive mortgage rates without hurting your credit score.
Partner’s Credit Score
If you’re buying with a partner, the lender will look at both of your credit scores. They typically use the lower “middle” score of the two applicants to determine rate and approval.
Bringing in a partner with excellent credit can potentially counterbalance your lower score. On the other hand, consider applying solo if your partner’s credit needs improvement.
Alternatives for Low Credit Scores
What if your credit score is under 600? While mortgages may be more challenging, some options include:
-
Apply with a lender specializing in low credit mortgages.
-
Find a co-signer with excellent credit to add to your application.
-
Consider FHA or other government loans that allow lower credit scores.
-
Work on improving your credit before re-applying.
With a lower credit score, be prepared for stricter requirements and potentially higher interest rates if approved. But for first-time homebuyers, owning a home is still achievable with less-than-perfect credit through the right programs and some perseverance.
The Takeaway
While a credit score of 760+ is ideal for the best mortgage rates, you can potentially qualify starting at 500 with an FHA loan. Conventional loans generally require a 620 minimum.
Improving your credit score before applying for a mortgage can save you thousands over the lifetime of the loan. Take some time to boost your credit through responsible money management. Get pre-qualified or pre-approved to see what you may be eligible for. And know there are options available even if your credit score is on the lower side.
With some diligence, perseverance and the right mortgage loan, the dream of owning your first home is within reach.
How can you raise your credit score before you buy a house?
You could potentially improve your credit score by trying these 5 strategies:
1. Pay down your debt
Paying off your credit card balances can make a big difference in your score, especially if youre close to your credit limit. Maxing out your cards could lower your score; paying off your cards could raise it.
2. Increase your credit limits and maintain old accounts
About one-third of your FICO credit score is determined by how much credit you use from the total amount you have—thats called your credit utilization ratio. Requesting a credit increase (in addition to paying down debt) can free up more of your credit line. A good guideline: Keep your total debt below 30% of your total credit limit. While it might be tempting to close old accounts, that can reduce your total available credit—and hurt your credit score.
3. Dont apply for new credit accounts
Avoid applying for new credit cards and loans in the run-up to your mortgage application. It will likely create a hard inquiry on your credit report, which could temporarily reduce your score.
4. Keep up with payments
A late payment could stay on your credit report for 7 years and potentially ding your credit score, according to the credit bureau Experian. If youve missed payments in the past, start paying future bills on time as soon as possible to begin repairing the damage.
5. Check your credit report for mistakes
“We recommend anyone considering buying a home review their credit report to check for inaccuracies,” says Valiton. You can get a free copy of your credit report at AnnualCreditReport.com. Look for mistakes that could hurt your score, such as a report of a delinquent bill you actually paid. Also check for lines of credit you never opened, which could suggest your identity was stolen. The next step is , to have them removed from your credit report.
How to buy a house with a lower credit score
Consider these tips if youre applying for a mortgage without a top-tier score:
Speak with multiple lenders
Shopping around and comparing rates and eligibility requirements can go a long way. One lender might be more accepting of your position and offer a better rate. Be ready to discuss your financials and explain why youd be a good borrower, even with a lower credit score. Having reliable income and a sizable down payment could help your case.
Consider an FHA loan
If you have steady employment, strong income, and a down payment of at least 10%, you might qualify for an FHA loan. Again, these government-backed mortgages have lower credit requirements, but youll have to cover mortgage insurance costs. This can be removed if you put down 10% or more and make on-time payments for 11 years.
Plan to refinance
You might qualify for a mortgage with a lower credit score, but youll likely get a higher interest rate than someone with better credit. When your credit score improves, you could potentially refinance to a better rate and lower monthly payment, though your loan term would restart.
Consider a co-signer
If you cant qualify on your own, you could ask someone close to you to co-sign the mortgage. Youre essentially asking them to vouch for you—and take on the mortgage if you default on your payments. Make sure to keep up with your mortgage payments: Otherwise, youll damage the co-signers credit and your own.
Best Home Loan for First Time Home Buyer With 700 Credit Score or Better
FAQ
What is a good credit score for a first time home buyer?
Homebuyers generally need a credit score of 500 to 700 to qualify for a mortgage. Grants offered through nonprofit organizations may have higher or lower standards.
What credit score is needed to buy a $300K house?
What is the best credit score to buy your first house?
A good credit score typically falls in the mid-600s to mid-700s on the commonly used 300-850 credit score range. Scores in the high 700s and above are generally considered excellent, while scores in the low 600s to mid-500s are considered fair.
What credit score do you need for a first mortgage?
You generally need a credit score of at least 620 to qualify for a conventional mortgage, though every lender is different. It’s possible to qualify for an FHA loan, which is backed by the federal government, with a credit score as low as 500.