When you want to buy a house, your credit score is only part of the equation. Buying a house also depends on many other factors, including your income, employment history and the type of loan you plan to take out. These details give lenders a more complete picture of your finances and how likely you are to pay back your loan.
In this guide, we’ll review what credit score is needed to buy a house along with the other criteria so you have a clear idea of what it takes to become a homeowner.
Why your credit score matters for a home loan
Your credit score tells lenders how risky you are as a borrower. Over time, you build a credit history, which is a collection of your debt repayments to banks, credit card companies, collection agencies, state and federal government entities and sometimes even your monthly utilities.
If your credit score is low, lenders will likely consider you a high-risk candidate. To get approved for a home loan (or any loan for that matter), it helps to have a high credit score.
Most lenders look at your FICO score to assess your creditworthiness when you apply for a loan. It’s not the only factor in appraising a borrower’s eligibility, but it is an industry standard, which is why the three major credit bureaus — Experian, Equifax and TransUnion — use it as part of their models.
Here’s a breakdown of FICO credit score ranges:
- 800 or higher: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 580 or less: Poor
Although an 800 credit score is considered perfect, you don’t need perfection to buy a house, (although it doesn’t hurt). What credit score is needed to buy a house also depends on the type of loan you are seeking.
Recommended credit scores based on loan type
When you’re looking to buy a house, there are four main types of mortgage loans to know about:
- Conventional loans
- FHA loans
- VA loans
- USDA loans
While individual lenders will determine for themselves what qualifies as a good credit score, below are the recommended credit scores to qualify for each type of home loan.
Conventional loans are the most familiar mortgage option. They’re typically offered by banks, credit unions and mortgage companies. These loans differ from the other loans on this list because they aren’t offered or backed by any government entity.
While a 30-year fixed mortgage is the most common type of conventional loan in the U.S., there are other options with different levels of flexibility, such as adjustable-rate and shorter-term conventional loans.
- Recommended credit score: 620-640+
- Typical down payment: 3%-5%
Federal Housing Administration (FHA) loans are geared toward low-to-moderate-income borrowers. These loans are backed by the FHA, which makes them less risky for lenders and easier for buyers to qualify. As such, credit score and minimum down payments are typically lower than many conventional loans.
- Recommended credit score: 580+
- Minimum down payment: 3.5%
VA loans are mortgage loans backed by the Department of Veterans Affairs. To qualify, you must be an active duty service member, a veteran, the spouse of a service member killed in the line of duty or a National Guard or Selected Reserve member with at least six years of service.
- Recommended credit score: 620+
- Typical down payment: 5% (though not required)
USDA home loans are backed by the United States Department of Agriculture and are offered to rural property owners. Like VA loans, there is no minimum score for USDA loans, but lenders that issue them typically expect a score of 640 or higher.
- Recommended credit score: 640+
- Down payment: None required
If your credit score is 700 or higher, you’ll have a much easier time qualifying for loans with lower interest rates. You may also qualify for “jumbo loans,” which are loans that exceed the Fannie Mae and Freddie Mac conventional loan limits.
As of 2020, the FHFA announced a maximum conforming loan limit of up to $510,400. Since loans exceeding this amount are considered high-risk, lenders typically require you to have a credit score of 720 or higher.
However, if you have a poor credit score, you’ll likely have a difficult time meeting your lender’s minimum credit score requirements. But all is not lost.
You can work on improving your credit score. One way to do that is paying down your credit card debt as fast as possible. This will boost your credit score and put you in a better position to apply for a home loan.
Other factors that affect your home loan application
Your credit score doesn’t paint the full picture of your finances for a lender. They also consider the following factors when assessing a borrower’s level of risk:
- Income and debt
- Employment history
- Your down payment
Income and debt
Mortgage lenders prefer borrowers with stable and steady income. To improve your chances of getting approved, it’s imperative to give them an accurate, up-to-date report of what you make.
Another factor lenders look at is your debt-to-income ratio (DTI), which tells them how much of your monthly income goes toward repaying your debt.
A high ratio means you probably can’t afford more debt, so a low DTI ratio is preferable. That said, having a large amount of debt (like credit card debt) isn’t necessarily a deal breaker.
Lenders typically expect to see two years of related job history, with at least six months of experience in your current role.
There are exceptions to the rule. For instance, self-employed workers may have less stable work due to the nature of their occupation. This doesn’t mean you wouldn’t qualify for a loan, though.
Mortgage lenders want to see consistency. The important thing is to show your lender that you’re gainfully employed and therefore, able to pay back your loan.
Your down payment
The rule of thumb in home buying is that mortgage lenders prefer when borrowers can offer a 20% down payment. That figure seems high, but it lowers the amount of risk for lenders. Also, some programs charge mortgage insurance if you can’t meet the 20% minimum.
But don’t feel pressured to meet this amount. The average first-time homebuyer puts down 7%, according to FreddieMac. There’s no rule or legal repercussions if you can’t put 20% down — it’s merely a widely-held benchmark for aspiring homebuyers.
How to strengthen your credit score
If you want a higher score so you can qualify for a home loan, here are some ways to do it.
Pay your bills on time
Avoid late payments altogether. When you pay your bills on time, you’ll improve your payment history and prove to lenders that you are reliable. If you’re struggling to make timely payments and chipping away at your credit card debt, consider an automated debt repayment service such as the Tally app to help you get ahead.
Keep your credit card balances low
Experts suggest you shouldn’t exceed 30% of your available credit (known as your credit utilization), but people with the best credit scores use even less.
If you want some hard figures to go by, the highest-scoring consumers — those with credit scores higher than 795 — use an average 7% of their credit limit. It’s hard to tell whether exceeding this amount will negatively affect your score, so it’s best to keep your balance as low as possible.
Dispute errors in your credit report
You can request one free credit report from each of the three main credit bureaus every 12 months. It’s not uncommon to find errors, which can lower your total score. If you find an error, you can dispute it and have your score amended.
The final word on what credit score is needed to buy a house
There are many answers to the question “What credit score is needed to buy a house?” While a credit score of 800 would be perfection, the reality is that most people aren’t there. The good news is that a perfect score isn’t required, and there are other factors that play a role in qualifying for a mortgage.
The type of loan, your employment history, and debt-to-income ratio are also critical factors, so focus on maintaining the overall health of your finances. Paying down your debt is a surefire way to improve your odds of approval and can eventually lead you to fulfill your dream of owning a home.