To purchase a property, you technically don’t need a credit score. Nobody really cares whether you have good credit if you’re paying cash. Yet, if you’ll require financing, like the majority of American aspirants to homeownership, your credit score will be a factor.
When you apply for a mortgage, one of the most crucial variables that lenders take into account is your credit score. Not just to be eligible for the loan itself, but also for the requirements: Generally speaking, the better terms and lower interest rates you’ll qualify for, the higher your credit score.
What then is a decent credit score for purchasing a home? Depending on the kind of mortgage you want: When it comes to the minimum credit score required to purchase a home, Federal Housing Administration (FHA), conventional loans, and jumbo loans all have different requirements. To qualify with most lenders, you’ll typically need a score of at least 620, or what’s known as a “fair” rating. But, you can be qualified for an FHA loan with a score as low as 500.
Credit score needed to buy a house by mortgage type
There isn’t a single, standardised credit score that can guarantee your eligibility for a mortgage (though having the maximum 850 score certainly never hurts). Yet, lenders do have minimal credit score criteria, even though they don’t specify exact qualifying figures.
Depending on the loan type and lender, there may be a minimum credit score required to qualify for a mortgage.
| Loan Type | Minimum Credit Score |
|---|---|
| Conventional loans | 620 |
| FHA loans | 500 (with 10% down payment); 580 (with 3.5% down payment) |
| USDA loans | 640 |
| VA loans | The VA has no minimum limit, but lenders generally like to see at least 620 |
| Jumbo loans | 700 |
Conventional loans: Commercial banks and savings and loan organisations provide conventional loans, which are mortgages that aren’t provided or backed by a U.S. government agency. You are generally more likely to get approved for a mortgage loan with these lenders the higher your credit score is. Many lenders will work with clients with credit scores as low as 620, but they could also have additional conditions for them, including a greater income or a bigger down payment.
Loans backed by the Federal Housing Administration (FHA) are available to those who have less than perfect credit and little money down, particularly first-time homeowners. If your credit score is 500 to 579, you may be eligible for an FHA loan with a 10 percent down payment; if it is 580 or above, you may only need to put down 3.5 percent.
USDA loans: This loan programme for borrowers with low to moderate incomes buying a house in a rural location is supported by the U.S. Department of Agriculture. In general, borrowers must have a minimum credit score of 640 to be eligible for a USDA loan. With further credit investigation, USDA lenders may in some situations take a borrower’s lower score into account.
VA loans are available to active-duty and retired military people as well as their families. They are backed by the U.S. Department of Veterans Affairs. Although many lenders—who actually issue the financing—demand a minimum score of 620, the government has no minimum credit score requirement for VA loans.
Jumbo loans: Jumbo loans are larger-than-average mortgages; they are above the conforming loan ceilings set by Freddie Mac and Fannie Mae, which are generally $726,200 at the moment. Because to the extra risk involved in borrowing such a big sum, many jumbo lenders need a credit score of 700 or higher to qualify.
What is a good credit score for buying a house?
When considering the best credit score to buy a house, many lenders use the FICO (Fair Isaac Corp.) model for credit scores. It grades consumers on a 300 to 850 point range, with a higher score indicating less risk to the lender.
- 800 or higher: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 579 or lower: Poor
How your credit score affects your mortgage rate
Although while it’s up to individual lenders to decide what credit score customers need to receive the lowest mortgage interest rates, a change of only a few points in your credit score can occasionally have a significant impact on your monthly payments. For a mortgage for $200,000, for instance, the monthly difference between a 5.5 percent and a 6 percent interest rate is $64. Over the duration of a 30-year mortgage term, it amounts to more than $23,000.
According to Bruce McClary, senior VP of communications at the National Foundation for Credit Counseling, having a poor credit score might reduce your chances of being approved for the lowest rates and could result in the rejection of your mortgage application. With a poor credit score, it is still feasible to get accepted, but you might need to get a co-signer or borrow less money overall.
It’s not always simple to convince someone to sign as a co-signer because they would be held accountable for the loan. Also, missing payments might harm both your relationship with your co-signer and their credit.
For each credit score range, the amount you would pay at the current rates (as of February 2023) is shown below. The national averages for a $30,000 30-year fixed mortgage loan are the basis for these instances.
| FICO Score | APR* | Monthly Payment | Total Interest Paid | Price Changes |
|---|---|---|---|---|
| 760-850 | 5.868% | $1,773 | $338,378 | If your score changes to 700-759, you could pay an extra $15,399 |
| 700-759 | 6.090% | $1,816 | $353,777 | If your score changes to 760-850, you could save an extra $15,399 |
| 680-699 | 6.267% | $1,850 | $366,169 | If your score changes to 700-759, you could save an extra $12,392 |
| 660-679 | 6.481% | $1,892 | $381,285 | If your score changes to 699-680, you could save an extra $15,115 |
| 640-659 | 6.911% | $1,978 | $412,083 | If your score changes to 660-679, you could save an extra $30,951 |
| 620-639 | 7.457% | $2,089 | $451,974 | If your score changes to 640-659, you could save an extra $39,891 |
Why your credit score matters to lenders
Lenders use your credit score to assess your likelihood of repaying the mortgage (and, subsequently, their risk). Lenders also look at your debt-to-income ratio (DTI), which is the proportion of your monthly debt payments to your income.
For instance, your DTI ratio would be 31% if you make $4,000 per month and owe $1,250 in credit card, loan, housing, and other obligations. Although some lenders would take more with a bigger down payment, the optimal ratio is less than 36 percent.
