Every potential homeowner knows that they need a good credit score to boost their chances of qualifying for a mortgage, as it indicates to the lender that you will likely pay back the loan timely. However, many are still plagued with the question, “What credit score do you need to buy a house?”
It’s an understandable query since the minimum score you need will depend on the type of mortgage you want, and, conversely, the score you have will impact your mortgage terms. So, without further ado, let’s explore everything you need to know about what credit scores you need for good mortgages.
What Credit Score Do You Need to Buy a House?
Contrary to popular belief, you don’t need a perfect credit score for a mortgage. Even though mortgage lenders use the FICO score to calculate interest rates and mortgage fees, they look at several other factors as well, including your assets, income, property type, and debt levels.
It’s why in certain cases, you can get a mortgage with a credit score in the 500s. With that said, since your credit score does estimate the risk of loan default, potential lenders will look for higher scores and reward you with lower interest rates and varied mortgage choices.
For most mortgages, the credit score you need is at least 620. Naturally, a higher score is better since lenders prefer scores of 740 or more. Moreover, since COVID-19, many lenders have increased their minimum credit score requirements even for mortgage types with lower score requirements.
Minimum Credit Score Required by Mortgage Type
Here are the minimum scores you need based on the type of mortgage:
The minimum credit score requirement for a conventional loan is 620. However, borrowers with higher scores have to pay lesser mortgage insurance, which is required when you make a down payment of less than 20% of your loan.
With a credit score in the 500s, you can try for a Federal Housing Administration (FHA) loan that requires down payments as low as 3.5% to borrowers with a score of 580 or more. With a score from 500 to 579, you will need to make a 10% down payment. But lenders can set their own credit minimums for FHA loans. If you have a credit score in the 500s, a lender will probably look at your judgments, liens, and collection accounts and need them to be paid off before giving you the loan.
The mortgages set by the Department of Veteran Affairs lenders are typically in the low to mid-600s. Their main qualification is for the borrower to be a veteran, eligible spouse, or active-duty military member.
Home loans from the US Department of Agriculture don’t have a specific minimum credit score, and lenders set their own score requirements. However, if you have a score of 640 and up, you can be eligible for credit processing on a USDA loan.
What Other Factors Lenders Consider before Giving You a Mortgage
Your credit score will determine your mortgage qualification, but lenders will also consider the following factors:
- Income: Lenders will look at your income to determine how much you can afford to pay every month and whether you can make timely payments or not.
- Debt-to-Income Ratio: A lender will study your monthly debts to ensure that your estimated mortgage payments and your total monthly debts don’t exceed more than 43% of your income.
- Savings: Lenders want to determine whether you have the savings needed to make your mortgage payments if you face financial troubles or stop receiving regular income.
- Down Payment: A lender will favor a borrower who can afford a bigger down payment and will give them a lower interest rate. A higher down payment makes you a less risky borrower.
- Employment History: Typically, lenders favor borrowers with a stable employment history.
Can You Get A Home Loan With a Poor Credit Score?
Some lenders will give you a home loan even if you have a low credit score. However, they will charge a bigger interest since a low score makes you a riskier borrower as it indicates a history of missing monthly payments and running up debt. You might also be required to come up with a large down payment.
If you’re unable to find an interested lender due to a poor credit score, you can find a co-signer with a good credit score to help you secure the loan. Alternatively, you can ask a family member to purchase the home and add you to the title so that you can refinance it into your name when your score improves.
How to Improve Your Credit Score?
Fortunately, you can boost your credit score for a mortgage loan by doing the following things:
- Check your credit history for errors and contact the bureau to fix them to boost your score.
- Become an authorized user on a family member’s existing credit card account.
- Pay all your bills, such as student loans, auto loans, personal loans, and credit card payments, on time every month.
- Pay down your credit card debt without canceling your account.
- Maintain low credit card balances and don’t use more than 30% of the limit on your cards.
The Bottom Line
Let’s get back to the question, “What credit score do you need to buy a house?” The truth is that for most mortgage types, you need a score of at least 620 for a fair mortgage deal. In certain instances, you can score a mortgage with a low credit rating, but you will have to pay more interest and make a higher down payment. If you have a low score, you can gradually improve it by making your payments on time.
If you want to secure a mortgage for your new home in Maine, get in touch with Integrity Mortgage. We will sit with you and help you find a loan that works for you.