What credit rating do I need to buy a home?
What credit rating do I need to buy a home?

Your credit rating is one of the most important factors that lenders consider when applying for a mortgage. Generally, the higher your score, the better rates and terms you are eligible for.

What is good credit for buying a home? The level of credit you need depends on the type of mortgage you are looking for. Federal Housing Administration (FHA) loans, traditional loans, jumbo loans, and other types of loans vary in the level of credit required to buy a home.

Before looking at a house, it’s a good idea to check your credit history and get your credit report from the three major credit bureaus. Dealing with credit problems early, before applying for a mortgage, can improve your score. Normally, you can access your credit report from any agency for free once a year, but due to the pandemic, you can now do so on a weekly basis until the end of 2022.

Credit Ratings Required to Buy a Home by Mortgage Type

The minimum credit rating to qualify for a mortgage depends on the loan type and lender. Generally speaking, the higher your credit score, the more likely you are to get a mortgage. Likewise, you want good or excellent credit with the best mortgage rates.

Below is a brief overview of typical minimum loan values ​​for different loan types:

  • Traditional Loans: Many lenders only accept traditional loans with a credit score of 620, but they may have other requirements for these borrowers, such as: B. Higher income.
  • FHA Loans: FHA provides loan guarantees for borrowers with low credit scores and a small down payment. If you have a score of 580 or higher, you can qualify for an FHA loan with a credit score of 500-579 with a 10% down payment or a 3.5% down payment.
  • USDA Loans: The USDA supports the USDA loan program for low- and moderate-income borrowers who purchase homes in rural areas. Borrowers typically need at least 640 points to qualify for a USDA loan. In some cases, USDA lenders consider lowering the score by performing additional analysis of the borrower’s credit.
  • Veterans Affairs Loans: With the support of the U.S. Department of Veterans Affairs, the Department of Veterans Affairs provides Veterans Affairs loans to active duty and veterans and their families. While many lenders require a minimum score of 620, the government does not have a minimum credit requirement to get a VA loan.
  • Huge Loans: These loans are for loan amounts that exceed the appropriate loan limit — $647,200 in most markets right now — and are the hardest to qualify if you have poor credit. Due to the increased risk, many large lenders require a credit score of 700 or higher to qualify.

What is good credit for buying a home?

When considering the best credit for buying a home, many lenders use the FICO (Fair Isaac Corp.) credit model. It scores consumers between 300 and 850, with higher scores indicating less risk to lenders.

  • 800 or higher: Excellent
  • 740-799: very good
  • 670-739: Good
  • 580-669: beautiful
  • 579 or lower: poor

How Your Credit Rating Affects Your Mortgage Rate

Although it is up to some lenders to determine what score a borrower must have to offer the lowest interest rate, sometimes even a few points difference in your credit score can significantly affect your monthly payment. For example, the difference between a 3.5% interest rate and a 4% interest rate on a $200,000 mortgage is $56 per month. That’s a $20,680 difference compared to a 30-year mortgage term.

“A low credit score can make you less likely to qualify for the cheapest interest rate and may even result in your mortgage application being rejected,” said Bruce McClary, spokesman for the National Credit Counseling Foundation. Circumstances may still be approved, but you may need to add co-signers or reduce the total amount you want to borrow.”

However, the co-signer will be responsible for the debt, so it’s not always easy to get someone to agree.

You can use Bankrate’s loan comparison calculator to check your credit score’s interest rate.

Use myFICO.com’s Loan Savings Calculator to find out how much you’ll pay for each credit rating at current interest rates. These examples are based on the national average for a $300,000 30-year term loan.

760-850 4.753% $1,565 $263,574 If your score changes to 700-759, you could pay an extra $14,544
700-759 4.975% $1,606 $278,118 If your score changes to 760-850, you could save an extra $14,544
680-699 5.152% $1,638 $289,841 If your score changes to 700-759, you could save an extra $11,723
660-679 5.366% $1,678 $304,163 If your score changes to 700-759, you could save an extra $26,045
640-659 5.796% $1,759 $333,418 If your score changes to 660-679, you could save an extra $29,255
620-639 6.342% $1,865 $371,450 If your score changes to 640-659, you could save an extra $38,032

Why Your Credit Score Matters to Lenders

Your credit rating can help lenders determine whether you can or cannot pay your mortgage (and your risk). Lenders also look at your debt-to-income ratio (DTI), which is your monthly debt obligation as a percentage of your income.

To put that into perspective, if you make $4,000 a month and have $1,250 in credit card, loan, housing, and other payments, your DTI ratio is 31%. The ideal ratio is below 36%, although some lenders will accept higher down payments.


Can I get a mortgage with a low credit score?

It’s possible to get a mortgage with a low credit rating, but you’ll pay higher interest rates and higher monthly payments. Lenders may be stricter about other aspects of your finances, such as: B. How much you owe if you have bad credit.

Note that credit requirements vary by lender. Check out multiple lenders to find one that’s right for you.

How to Improve Your Credit Score to Buy a Home

If you have bad credit, you still have options. Rather than meeting the mortgage rate you currently qualify for, delay your home purchase and work to restore your score and improve your options. Here are some quick tips:

1. Check your credit report and correct any errors

Before applying for a mortgage, get a copy of your credit report from the three major credit bureaus: Experian, Equifax and TransUnion. You are now entitled to a free credit report from any agency until the end of 2022. If you find information that is inaccurate or missing, file a complaint with the credit bureaus and creditors. Clearly identify each item you dispute and be sure to include supporting documentation.


2. Pay off credit card balances that are less than 30% of your credit limit

Your credit utilization ratio is the amount of your debt compared to your available credit. To calculate this, divide the amount of debt by the amount of available credit.

For example, if you have $10,000 in debt and an available balance of $20,000, your credit utilization rate is 50%. Lenders want to see loan utilization rates of 30% or less.

3. Pay all bills on time

Your payment history accounts for 35% of your credit score. While late payments remain on your credit report for seven years, their impact on your score diminishes over time.

4. Don’t close old credit lines after paying them off

Closing unused accounts sounds like a good idea, but it can improve your credit utilization and lower your credit score.

5. Don’t open new lines of credit or large loans

The less debt you have, the better off you are. FICO does not recommend opening a new credit account to increase your credit utilization, as each credit request will slightly lower your score. If your credit rating has improved, please rate it within 30 days. Distributing price requests can hurt your score. You can also use our mortgage calculator to estimate your monthly mortgage payments.

Bottom line

A universal credit score is not required to buy a home, as the score requirements depend on the type of loan you take out. Generally speaking, the higher your score, the easier it is to qualify for a mortgage. Therefore, it is important to improve your credit score in order to get better mortgage rates from lenders.

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Jake Smith

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Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.