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The Credit Score You Need to Buy a House

Sep 5, 2019

Your credit score tells lenders how healthy your finances are and how likely you are to make your mortgage payments on time. The necessary credit score for buying a house varies depending on the loan you use, but a higher score is always better. If you make the effort to improve your credit score now, you can enjoy a lower interest rate and smaller mortgage payments on your new home.

What Your Credit Score Means to Lenders When You're Buying a House

Your credit score gives lenders an idea of how you manage your finances. A high credit score indicates that you manage your loans and credit cards well. You use them often yet make your payments on time.

Lenders look at your credit score to determine the risk of providing you with a home loan. The lower your score, the greater the risk is for lenders, which will make it more difficult for you to get a loan. If you are approved, you'll likely have a higher interest rate. A high credit score means that you'll be able to obtain a loan more easily and get a lower interest rate.

Applicants with a lower credit score can compensate somewhat with other indicators of good financial health. These elements include the following:

  • A long employment history with your current employer.
  • High, stable income.
  • A significant amount of savings.

FHA Credit Score Requirements

You can generally get an FHA loan with a credit score of 580 or above. In some cases, you may be able to get an FHA loan with a score as low as 500, but this scenario is much more difficult.

If you have a lower credit score, you'll need to make a larger down payment for your new home. To get a loan with a score between 500 and 579, you must put down at least 10% of the home's selling price. With a high credit score for buying a house, you can provide a smaller down payment. If your credit score is 580 or above, you can typically put down as little as 3.5% of the home's price.

You can also opt for an FHA 203(k) loan. Ideal for fixer-uppers, this home renovation loan includes funds for both the home and the cost of renovating the property. This loan is available to applicants with a minimum credit score of 620.

How You Can Check Your Score

Credit score inquiries fall into two categories. Hard pulls, which happen when you apply for a loan or credit card and the issuer checks your credit, lower your score. Soft pulls, occurring when you check your own credit score, don't cause harm. You can check your credit score through many credit card issuers. Contact your card providers to learn whether they offer credit scores through your account. Many credit card issuers allow you to check your score through your card's online portal.

You can receive your full credit report without penalty once a year from each of the three major reporting agencies: Experian, Equifax, and TransUnion. These reports detail the information that determines your credit score. Review these reports annually to make sure the information is correct. If the details on your credit report are wrong, you may have a lower credit score for buying a house than you deserve.

You have the legal right to dispute any inaccurate information on your credit reports. If you find an error, contact the credit reporting company in writing to file a dispute.

So What Actually Affects My Credit Score When It's Time to Buy a House?

Your credit score is impacted by several factors:

  • Payment history: Lenders look for a long history of on-time payments for credit cards and other loans. Timely payments for rent and utilities don't count toward your credit score, but if you miss these payments, the debt can go to a collection agency, which will have a negative impact on your score.
  • Credit usage: Lenders prefer credit usage of 30% or less. This figure is the percent of credit you've used compared to the total amount available on your cards.
  • Length of credit history: A long credit history gives you more credibility.
  • Credit mix: Your credit score increases moderately when you have a mix of loan types, such as credit cards, student loans, and auto loans.
  • Recent credit applications: Lenders prefer applicants who haven't recently obtained or applied for new loans or credit cards.

Your score drops if you miss payments, max out your credit cards, or apply for several new loans or cards in a short period of time.

The fastest way to improve your credit score for a home loan is by paying down your outstanding debt and making all your minimum payments on time. Missed payments stay on your credit report for seven years.

Don't close unused cards, as the available credit keeps your utilization ratio low. Try not to apply for any new lines of credit as you're preparing to buy a home. Inquiries into your credit will lower your score. These inquiries stay on your report for two years.

Check Your Mortgage Loan Options

While an FHA loan is most readily available, it may not always be the best option. If you have a higher credit score, you should explore all your choices and find the loan that's best suited to your individual needs. Consider the following options:

  • VA Loans: Available to veterans, VA loans have low interest rates and closing costs, and they allow you to finance 100% of your purchase. A credit score of 620 or higher is preferred, but some lenders will consider applicants with lower scores.
  • USDA Loans: USDA loans are available for homebuyers purchasing property in rural areas. Your household income must be no more than 115% of the median income in the area. You need a credit score of 640 or higher to qualify.
  • Conventional Loans: Conventional home loans typically require a credit score of 620 or higher. These types of loans come from private lenders.

If you're interested in purchasing a new home, improving your credit score and getting a great deal on your loan are essential to the process. Keep your credit score high to get the best outcome possible on this major purchase.