What Credit Score Is Needed to Buy a House?
When buying a house, your credit score is crucial for securing a mortgage, impacting both your likelihood of approval and the interest rate you'll receive. In this guide, we’ll cover the minimum credit scores needed for different loan types, the importance of higher scores, potential savings, and strategies for improving your credit score to achieve the best mortgage terms possible.
Minimum Credit Scores for Different Loan Types
Different loan types have varying credit score requirements. Here’s what you need to know:
Conventional Loans: A minimum FICO score of 620 is typically required for conventional loans. These are standard mortgages not backed by the government, with favorable rates for higher scores.
FHA Loans: FHA loans, insured by the Federal Housing Administration, are popular among first-time buyers and those with lower scores. A score of 580 or higher qualifies for a 3.5% down payment, while scores between 500 and 579 may still qualify but require a 10% down payment.
VA Loans: Available to eligible veterans and active service members, VA loans generally have no official minimum score, though many lenders set their minimum around 620.
USDA Loans: USDA loans, supporting rural and suburban homebuyers, don’t officially require a minimum score, though lenders often prefer a score of 640 or higher.
Why Higher Scores Matter
Higher credit scores offer significant advantages, including better interest rates, more favorable terms, and lower fees. Here’s why a high credit score is beneficial:
Interest Rate Impact: Even a slight increase in your score can lower your interest rate, which has a compounding effect on the total cost of your loan.
Loan Approval Likelihood: Higher scores indicate responsible credit management, boosting your chances of approval and possibly speeding up the loan process.
Examples of Interest Rate Savings Based on Credit Score
Here’s a breakdown of potential savings on a $300,000 mortgage over a 30-year term:
Credit Score 620-639: Approximate interest rate of 7.68% leads to a monthly payment of $2,131.
Credit Score 760-850: Interest rate as low as 6.29% with a monthly payment of $1,856.
Monthly Savings: $275
Total Savings Over 30 Years: Around $99,000
Even modest score improvements, like moving from the 660-679 range to 680-699, can result in interest rate reductions that save you thousands over the loan term.
Benefits of a Higher Credit Score Beyond Interest Rates
Beyond reducing your mortgage interest rate, a higher credit score provides additional advantages:
Increased Approval Odds: Lenders are more inclined to approve higher scores, which is especially valuable in competitive housing markets.
Higher Loan Limits: A high score may result in approval for larger loan amounts, expanding your housing options.
Reduced Private Mortgage Insurance (PMI): On conventional loans, a high score can help reduce or eliminate PMI, which translates into monthly savings.
Lower Home Insurance Rates: Some insurers consider credit scores when determining premiums, and a higher score could lead to lower rates.
Quicker Approval Process: High scores typically lead to streamlined approvals, helping you act fast in competitive markets.
Future Refinancing Options: A high score is advantageous when refinancing, potentially providing access to better terms.
Strategies to Improve Your Credit Score Before Buying a House
Improving your credit score before applying for a mortgage can save you money over the long term. Here’s how to increase your score effectively:
Pay Bills on Time: Since payment history makes up 35% of your FICO score, on-time payments are essential. Setting up automatic payments can help you stay on track.
Lower Credit Utilization: Aim to keep credit card balances below 30% of your available credit, which accounts for about 30% of your score. Lowering utilization can quickly boost your score.
Limit New Credit Inquiries: Each hard inquiry temporarily reduces your score, so avoid applying for new credit cards or loans just before a mortgage application.
Keep Old Accounts Open: Length of credit history impacts your score, so keeping older accounts open can improve this factor.
Correct Credit Report Errors: Regularly check your credit report for mistakes and dispute any errors with credit bureaus, as inaccuracies can unnecessarily lower your score.
Become an Authorized User: If a family member with excellent credit adds you as an authorized user on their card, their positive history can help your score.
Use a Secured Credit Card: If your credit is limited or damaged, a secured card backed by a deposit can help you rebuild your score responsibly.
Diversify Your Credit Mix: A blend of credit types, such as installment loans and credit cards, positively influences your score.
Consider a Credit-Builder Loan: These loans are specifically designed to help build credit and can be a good option if you have limited credit history.
Improving your score by even 20-40 points can lead to more favorable loan terms, potentially saving you thousands over the life of your mortgage.
Final Takeaway: Plan Ahead for the Best Mortgage Terms
Your credit score is a key factor in determining the cost of your mortgage and overall affordability of homeownership. Start building or improving your credit six to twelve months before buying a house to achieve the best mortgage terms. By focusing on proactive steps to improve your score and understanding the credit requirements for different loan types, you can optimize your chances of securing the best possible rate and terms on your mortgage, making homeownership more affordable and financially rewarding.
