What Credit Score Do You Need To Buy A House?
Victoria Araj5-minute read
October 25, 2022
Your credit score is a very important consideration when you’re buying a house, because it shows your history of how you’ve handled debt. And having a good credit score to buy a house makes the entire process easier and more affordable – the higher your credit score, the lower mortgage interest rate you’ll qualify for.
Let’s dive in and look at the credit score you’ll need to buy a house, which loan types are best for certain credit ranges and how to boost your credit.
Determining A Qualifying Credit Score
Before we get into the credit score you need to qualify, you might be wondering how lenders determine your credit score. After all, your FICO® Score is reported by three different bureaus.
If you're applying for a loan on your own, lenders get your credit score from each of the three major credit rating agencies and use the middle or median score to qualify you.
If there are two or more borrowers on a loan, the lowest median score among all clients on the mortgage is generally considered the qualifying score. The exception to this is a conventional mortgage with multiple clients being backed by Fannie Mae. In that case, they average the median scores of the borrowers on the loan.
If you have a median score of 580 and your co-borrower has a 720 credit score, the average credit score would be 650. Because the minimum qualifying score for conventional loans is 620, this can mean the difference between qualifying for a mortgage and not.
One thing you should know is that for the purposes of your rate and mortgage insurance, the lowest median score is the one that gets reported, so your rate might be slightly higher. There are also certain situations in which Fannie Mae still uses the lowest middle score for qualification. We recommend speaking with a Home Loan Expert.
Credit Score Needed To Buy A House (By Loan Type)
Your credit score is a number that ranges from 300 to 850, and that number is used to indicate your creditworthiness. The higher your score, the more lenders will want to work with you. Though higher credit scores are considered more favorable for lenders, it’s still possible to get a mortgage with less-than-ideal credit. It all depends on the type of loan you’re applying for. Conventional and government-backed loans have different credit score requirements.
Conventional Loan Requirements
Conventional loans aren’t guaranteed or backed by a government program. They’re best suited to borrowers that have higher credit scores and money saved up for a down payment. It’s recommended you have a credit score of 620 or higher when you apply for a conventional loan. If your score is below 620, lenders either won’t be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments.
FHA Loan Requirements
If you have a lower credit score or don’t have much cash socked away for a down payment, you might consider an FHA loan, which is insured by the Federal Housing Administration. The minimum credit score for an FHA loan is usually 580. However, having a higher credit score may still help you qualify for a better FHA mortgage rate.
VA Loan Requirements
A government-backed VA loan might be an option for you if you’re a veteran or qualified servicemember or spouse. There’s no industry-set minimum credit score to buy a house, but Rocket Mortgage® requires a credit score of at least 580 for a VA loan.
USDA Loan Requirements
You could look into a government-backed USDA loan if you plan to live in a qualified rural or suburban area and have an income that falls below 115% of the area’s median income. Most lenders require a minimum credit score of 640 for USDA loans.
Rocket Mortgage does not offer USDA loans at this time.
Understanding Your Credit Score
Once you have a basic understanding of what credit score is needed for each type of loan, it’s time to take your own score into consideration. That means looking at your credit report.
Your credit report is an essential part of understanding your credit score, as it details your credit history. Any mistake on this report could lower your score, so you should get in the habit of checking your credit report at least once a year and report any errors to the credit reporting agency as soon as you find them. You’re entitled to a free credit report from all three major credit reporting agencies once a year.
If you’d like to check your credit score, Rocket Homes℠, a sister company to Rocket Mortgage, can help. Rocket Homes helps you track and understand your credit profile. Rocket Homes allows you to view your TransUnion® credit report, which is conveniently updated every 7 days to ensure you get the most up-to-date information, as well as your VantageScore® 3.0 credit score.
Once you know your score, you can assess your options for a conventional or government-backed loan – and, when you’re ready, apply for a mortgage.
FICO® Score Vs. Credit Score
The three national credit reporting agencies – Equifax®, Experian™ and TransUnion® – collect information from lenders, banks and other companies and compile that information to formulate your credit score.
There are lots of ways to calculate a credit score, but the most sophisticated, well-known scoring models are the FICO® Score and VantageScore® models. Many lenders look at your FICO® Score, developed by the Fair Isaac Corporation. VantageScore® 3.0 uses a scoring range that matches the FICO® model.
The following factors are taken into consideration to build your score:
- Whether you make payments on time
- How you use your credit
- Length of your credit history
- Your new credit accounts
- Types of credit you use
How To Increase Your Credit Score Before Buying A House
If you want to qualify for a loan and your credit score isn’t up to par, you can take actionable steps to increase your credit score. Rocket Mortgage is not a financial advisor, so it’s best to consult a professional for help repairing your credit.
Tip #1: Pay Off Outstanding Debt
One of the best ways to increase your credit score is to identify any outstanding debt you owe and make payments on that debt until it’s paid in full. This is helpful for a couple of reasons. First, if your overall debt responsibilities go down, then you have room to take more on, which makes you less risky in your lender’s eyes.
Second, it improves your credit utilization ratio or how much you spend compared to your total credit limit. Lenders look at this ratio to determine whether you’re a risky or safe borrower. The less you rely on your card, the better.
To get your credit utilization, simply divide how much you owe on your card by how much spending power you have. For example, if you typically charge $2,000 per month on your credit card and divide that by your total credit limit of $10,000, your credit utilization ratio is 20%.
Tip #2: Pay Bills On Time
A large part of what a lender wants to see when they evaluate your credit is how reliably you can pay your bills. This includes all bills, not just auto loans or mortgages – utility bills and cell phone bills matter, too.
Tip #3: Don’t Apply For Too Much Credit
You should resist the urge to apply for more credit cards as you try to build your credit, because this puts a hard inquiry on your credit report. Too many hard inquiries can negatively affect your credit score.
Other Considerations When Buying A House
Your credit score is just one element that goes into a lender’s approval of your mortgage. Here are some other things lenders look at.
1. Debt-To-Income Ratio
Debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward paying off debt. Again, having less debt in relation to your income makes you less risky to the lender, which means you’re able to safely borrow more on your mortgage.
To find your DTI, divide the amount of recurring debt (credit cards, student loans, car payments, etc.) you have by your monthly income. Here’s an example:
If your debt is $1,000 per month and your monthly income is $3,000, your DTI is $1,000 / $3,000 = 0.33, or 33%.
It’s to your advantage to aim for a DTI of 50% or lower; the lower your DTI, the better chance you have at being offered a lower interest rate.
2. Loan-To-Value Ratio
The loan-to-value ratio (LTV) is used by lenders to assess their risk in lending to you. It’s the loan amount divided by the house purchase price.
For example, let’s say you buy a home for $150,000 and take out a mortgage loan for $120,000. Your LTV would be 80%. As you pay off more of your loan, your LTV decreases. A higher LTV is riskier for your lender because it means your loan covers a majority of the home’s cost.
LTV decreases when your down payment increases. Going off the example we’ve just used, if you get a mortgage of $110,000 instead because you put down $40,000 ($10,000 more than before), your LTV is now 0.73, or 73%.
Different lenders accept different LTV ranges, but it’s best if your ratio is 80% or less. If your LTV is greater than 80%, you may be required to pay a form of mortgage insurance . Keep in mind that this varies by loan type and some loans, like VA loans, may allow you to finance the full purchase price of the house without you having to pay mortgage insurance.
3. Income And Assets
Your lender wants to be sure that you maintain steady employment. Lenders often ask for 2 years of proof of income and assets. The steadiness of your income could affect the interest rate you’re offered.
The Bottom Line
The credit score required to buy a home differs based on the type of loan you’re applying for. But the higher your score is, the easier it will be to get a great mortgage loan. The key is to stay on top of your score and check your credit report regularly.
Ready to start making offers on homes? Learn about mortgage preapprovals and how they can help you get into the home of your dreams faster.
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