What Credit Score Do I Need to Buy a Home?

A couple surveys a house with a realtor.

On average, you only need to have a FICO® credit score of at least 580 to be approved for a loan from a conventional lender. To qualify for a mortgage with the lowest interest rates, you need a score of at least 780 (it can vary based on lenders and where you live). 

But there’s a world of difference between the credit score you need to qualify for a mortgage, and the credit score you need to be offered a mortgage with the lowest interest rates.

Think of it this way. If you take out a 30-year mortgage on $229,000 house (the national average) at a 4% interest rate (fair) as opposed to a 3.5% interest rate (good), that’s a $23,388.73 difference. Every little percentage point saves you thousands. 

Here’s what you need to know about how your credit score will factor into determining your mortgage. 

Which Credit Scores Do Mortgage Lenders Use? 

Most lenders determine creditworthiness by examining a person’s FICO® Score or VantageScore. 

What Is a FICO Score? 

Introduced in 1956 by the Fair Isaac Corporation, the FICO Score is one of many types of credit scores but is one of the most widely used. The three-digit number is used by lenders and credit card companies to assess your “risk factor,” and determine how likely you are to pay your loan or credit card bills on time. 

Pie chart detailing what contributes to your FICO score.

FICO Scores can range from 300 to 850, with 850 considered “excellent” and 300 “poor.” The FICO Score is made up of five factors that influence credit ratings:

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of Credit History (15%)
  • Credit Mix (10%) 
  • New Credit (10%)

What is a VantageScore?

VantageScores range from 501 – 990. VantageScores are calculated using the same factors as FICO scores, with an additional sixth factor: depth of credit. 

How Long Do Negative Items Stay on Credit Reports?

Most negative items such as student loan debt, defaults, chapter 13 bankruptcies, late payments and payments in collections can stay on a credit report for as long as seven years. On the other hand, chapter 7 bankruptcies can stay on a credit report for 10 years. That means long after former mistakes and missteps have been paid off and corrected, negative items can still linger. It’s not great, but fortunately, it doesn’t mean you can’t buy a house.  

There are options—such as first-time homebuyer assistance programs—that can help you find home financing loans and grants.

What Are First-Time Homebuyer Programs and Mortgage Loans?

The federal government and most states offer specialized loan programs that assist first-time homebuyers and certain demographics by offering lower down payments, reduced investor rates, and options to defer payments. Several examples of specialized home mortgage loans include: 

FHA Loan Program – A mortgage that is insured by the Federal Housing Administration (FHA). This is a popular option for first-time homebuyers because down payments can be as low as 3.5% for credit scores 580+. 

USDA Loan Program – This option has a zero down payment for suburban and rural homebuyers. Loan borrowers can make a down payment of little to nothing but will have to pay a mortgage insurance premium. 

VA Loan Program – Offers a zero down payment mortgage for veterans and select spouses guaranteed by the U.S. Department of Veteran Affairs. It allows for 103.3% financing without needing to purchase private mortgage insurance. 

Good Neighbor Next Door Program – The goal is to encourage law enforcement officers, firefighters, medical technicians and teachers (Pre-k – 12) to become first-time homeowners. If qualified, participants receive potential discounts of 50% off of the listed price of the home. 

It all boils down to where you live. Requirements will vary depending on the state, city and location of residence. Check out organizations that conduct reports on affordable housing across the U.S. and catalog first-time homebuyer assistance programs by the state agency.

What Other Factors Qualify You for a Mortgage?

Conventional mortgage lenders heavily weigh your credit score, but it’s not the only factor that lenders consider. Each lender is different, however, typical other contributing factors include:

  • Tax returns from the past two years
  • Bank and investment savings
  • Business profits and losses (for business owners)
  • Debt-to-income ratio
  • Employment history and income
  • Total amount of down payment
  • Past negative credit history, delinquencies and bankruptcies
Other factors that affect home loans.

Can I Get a Mortgage With Bad Credit?

It’s possible to get a home loan with a bad credit score, but it’s definitely harder. It’s estimated that 35% of Americans have a credit score below 670. Between 580 and 669 is considered “fair,” while 579 and below is “poor.” FHA and VA loans, as well as some specialized lenders, work with low credit scores and make it possible to take on a mortgage.

When applying for a loan, lenders check your credit score to decide if you qualify for the loan and how much interest to charge. Those with less than stellar credit will have to pay a higher interest rate, such as with a subprime loan. This can make it harder to pay back the loan quickly.

How Do I Raise My Credit Score?

The first step is to actually check your credit score (don’t worry, checking your own score is a soft inquiry and it won’t hurt your credit), ideally with all three credit bureaus: Experian, TransUnion and Equifax. Once you know exactly where you’re starting from, you can get working on improving your score. Here are a few tips:

1. Pay Bills on Time

We know it’s obvious, but it’s so important we list it as our number 1. Lenders want to know how reliable and consistent you are with paying your bills every month. This includes rent, auto loans, student loans, cell phones and other utilities.

2. Pay Off Outstanding Debts

Pay off any outstanding debts or collections and keep your credit card balances low. There are a few ways to do this, either by paying off the debt with the highest interest first or paying off the lowest amount and snowballing payments into your highest outstanding amounts.  

3. Don’t Open New Credit Cards

The goal is to decrease debt, not incur new debt. If current payments are too much, consider consolidating several bills onto one credit card. This will make it easier to manage your monthly payments. 

4. Don’t Close Paid off Credit Card Accounts

Once you pay off a credit card, don’t close the account. Banks and mortgage lenders look at credit history and age of credit, in addition to the number of open accounts. If one is closed, there are fewer accounts in circulation, meaning that there is less potential money coming your way. 

5. Check Your Credit Report for Errors 

Checking your credit report for inaccuracies and errors is time-consuming and daunting, but correcting even a few errors can improve your credit score by several points. 

5 simple ways to increase your credit score.

Evaluating your credit report and setting financial goals are great strategies for fixing your credit score and moving towards homeownership. It’s not an overnight process and there is no magic formula, but with time, patience and consistency, you’ll be able to tick “homeowner” off your bucket list. 

Posted in Mortgages
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