Whether you’re eyeballs-deep in mortgage paperwork or you’re just beginning to consider (figuratively) kissing your landlord goodbye and buying a home, one question is probably weighing heavily on your mind: What credit score is needed to buy a house?
The answer is — like practically everything about real estate and the homebuying process — complicated.
Lenders do care a lot about your credit score because it tells them how you’ve managed money in the past. The lower your score, the higher your risk of defaulting.
But the truth is, there’s no one magic credit score that guarantees you’ll be approved for a mortgage.
And while your credit score is one of the most important factors your lender considers when you apply for a mortgage, that three-digit number isn’t the only thing that determines whether you’re approved or denied.
Wait, What’s a Credit Score? And What Credit Score Is Needed to Buy a Home?
First things first: A credit score is a number that tells creditors how likely you are to repay debt.
But you do not have just one single credit score. You have three scores, one with each of the major credit bureaus: Equifax, Experian and TransUnion. The scores are generated by FICO, a data analytics company, using information provided by each bureau.
But where it gets tricky is that lenders often use industry-specific versions of your score. That’s because your risk of defaulting on a home loan is different from your risk of not making your car payment.
FICO scores range from 300 (relax, there’s almost zero chance yours is this low) to 850. As of 2015, the average credit score was 695, according to ValuePenguin.
You’ll typically get the best rate and terms on a mortgage if you have good credit — usually about 760 or higher.
But what’s the lowest credit score you can have if you want to buy a house? Let’s say it all together now: It’s complicated.
You may have seen advertisements for homebuyer programs with low minimum credit score requirements.
We’ll discuss the requirements for specific programs later, but for now, let’s look at the increasingly popular FHA mortgage, which is a loan insured by the Federal Housing Administration known for its low down-payment requirements and credit score leniency.
You can qualify for an FHA loan with a 3.5% down payment with a credit score as low as 580 — which is considered a poor credit score.
But having a 580 credit score does not guarantee you will be approved for an FHA loan or any other mortgage. That’s just the minimum for the federal government to insure your loan.
Each lender has its own criteria that determine whether you’re approved for a mortgage, and with a 580 credit score, it would probably be difficult to find a lender to approve your mortgage.
Consider the following Credit Sesame survey of 600 people who applied for a mortgage:
Of those who applied for a $150,000 mortgage, 62% of respondents with a credit score in the “fair” range (650-700) were denied. Applicants with a “good” score of 700-750 were denied 23% of the time. Meanwhile, 91% of applicants with a score below 550 were denied.
The bottom line is: There’s no absolute minimum credit score to get a mortgage, but the higher your score, the better your odds are of approval.
Do Mortgage Lenders Look at All Three Scores?
It depends on the lender. Some will just pull one score; others use two or all three. If your lender pulls two scores, it will usually use the lower one. If it pulls all three, your middle score will typically be used.
Can You Get a Mortgage if You Don’t Have a Credit Score?
The frustrating thing about credit is that paying your rent, utilities and other bills on time doesn’t help you build a credit history.
According to ValuePenguin, about 1 in 7 adults in the U.S. have no credit score, typically because they haven’t used credit in at least six months.
If you don’t have a credit score, it will be difficult (but not completely impossible) to get a mortgage.
If you have a history of paying your bills on time, you may be able to qualify for an FHA loan with no credit history, although it might be tough to find a lender.
You’re more likely to get approved through a smaller lender, particularly one that offers manual underwriting, which basically means that a human, rather than an algorithm, decides whether you’re approved.
What if I’m Applying for a Mortgage With a Spouse or Someone Else?
Your lender will look at both of your credit scores — which means that if your spouse or any other co-applicant has a low credit score, it could disqualify you.
If your partner has bad credit, one workaround would be to leave them off the application, meaning the home and debt would be solely in your name.
You could always refinance and add them as a co-borrower once they improve their credit.
What Other Factors Do Mortgage Lenders Consider?
Your credit score can absolutely make or break your application.
That said, lenders want to know A LOT about you before they approve you for what’s probably the biggest purchase of your life. Here are some other factors they’ll consider.
While lenders have different requirements, a good rule of thumb is that your principal, interest, property taxes and insurance payments (both property and private mortgage insurance), plus homeowner association fees if applicable, shouldn’t exceed 28% of your pretax income.
Lenders want to make sure you don’t have too much debt. That’s why they pay close attention to your debt-to-income ratio, which is the percentage of your gross household income that goes toward minimum debt payments.
To get a qualified mortgage — that is, one that complies with the Consumer Financial Protection Bureau’s regulations that were designed to make sure borrowers could afford to repay their loans — you’ll need a debt-to-income ratio of 43% or lower.
You may still be able to get a mortgage if your debt-to-income ratio is higher than 43%, but it’s likely to come with high fees and other risky features.
Chances are, you won’t need the traditional 20% down payment. But if you can afford it, it does come with lots of advantages: lower interest rates and monthly payments, and you might not need private mortgage insurance.
We’ll get into specific types of mortgages and how much you need to put down for each later, but the median down payment for first-time homebuyers is just 6%, according to the National Association of Realtors. And some programs allow you to put down even less.
If you have a weak credit score, a larger down payment could help you get a mortgage loan for that new home.
Your lender will typically want to see at least two years of continuous employment before approving you.
This doesn’t necessarily mean you need to have stayed in the same job for the two years before you get a mortgage, although if you’ve recently switched to a completely different field, this could make your lender nervous.
Minimum Credit Score by Mortgage Type
The government “backs,” or insures, some mortgage loans, such as the FHA loans we discussed earlier.
With these loan programs, the government guarantees lenders that they’ll get paid even if borrowers default.
As a result, riskier borrowers with lower credit scores are able to get mortgages they might not qualify for otherwise. These are known as unconventional loans.
A conventional loan is a mortgage that isn’t backed by the government. That means banks have stricter criteria for approval.
They typically require that these loans meet the standards set by Fannie Mae and Freddie Mac, the giant government-controlled companies that buy up loans and sell them on the secondary mortgage market.
(Fun fact: Your bank or credit union will probably sell your home loan on the secondary mortgage market, rather than holding on to it for the life of the loan.)
Below are the minimum requirements for each type of loan.
Remember, though: These are just the minimum requirements that the government sets to back unconventional loans. In the case of conventional loans, they are the requirements set by Fannie and Freddie to repurchase loans. Your bank or credit union will often require a higher score.
If you qualify for a conventional loan, you’ll pay lower interest rates. You can also often avoid paying an upfront mortgage insurance payment, which many unconventional loans require.
Conventional loans typically require a down payment of at least 5%.
Minimum credit score: 620-640
These FHA-insured mortgages have smaller down payments and closing costs than conventional loans, but you have to pay an upfront mortgage insurance premium of 1.75% of the loan’s value.
Also, your monthly payment can’t be more than 31% of your gross monthly income.
Minimum credit score: 500 if you put 10% down; 580 if you put down 3.5%.
The U.S. Department of Veterans Affairs insures parts of mortgages for active-duty military, veterans and surviving spouses.
No down payment is required, but you have to pay an upfront funding fee of 2.15% to 2.4% of the loan unless you qualify for a waiver.
Minimum credit score: No minimum score is required by the VA, but lenders usually require a score of 620.
The U.S. Department of Agriculture (USDA) backs mortgages for homes in certain rural areas through this program. No down payment is required.
Minimum credit score: No minimum score is required by the USDA, but lenders usually require a 640.
How Your Credit Score Affects Your Mortgage Rate
The lower your credit score, the higher you can expect your interest rate to be on your mortgage. That’s because your interest rate is based in part on how risky you’re considered as a borrower.
FICO has a handy mortgage calculator that shows you how much interest you can expect to pay on a mortgage loan based on your credit.
As of Feb. 1, 2019, if you have a credit score of 760 or above, you could expect to pay an annual percentage rate (APR) of 3.979% on a 30-year fixed loan of $150,000. But if your credit score is between 620 and 639, your APR would be around 5.568%.
You may be thinking: “So what? What’s a measly 1.6 percentage points?” Well, consider how your interest rate affects your payment over the life of the loan:
|FICO score||APR||Monthly principal payment||Total interest paid|
In the example above, having a credit score of 760 or higher would save you more than $50,000 over 30 years compared with if your score was in the 620-639 range.
How to Get Your Free Credit Score
OK, so now you know that having a good credit score is mega important when you apply for a mortgage. But how do you find out your credit score?
To keep a closer eye on your credit, get your credit score and a “credit report card” for free from Credit Sesame. It breaks down exactly what’s on your credit report, how it affects your score and how to address it — in layman’s terms.
4 Steps for Improving Your Credit Score Before You Buy a House
So, what if you’ve checked your credit score and what you found was less than desirable? You can improve your score. It’s not going to happen overnight, but these tips can help.
1. Make On-Time Payments No Matter What
Your payment history is the most important factor in determining your credit score, accounting for 35% of your score.
Set up automatic payments for at least the minimums using your bank’s online bill-pay system so you’re never late on a payment.
2. Look for Errors on Your Credit Report
More than 1 in 5 consumers have at least one possible error on their credit reports, according to the Federal Trade Commission.
Removing inaccurate negative information, such as a delinquent account that doesn’t belong to you, is the quickest way to boost your score.
If you find errors on any of your credit reports, your first step is to dispute the information with the bureaus.
3. Ask Your Credit Card Companies to Increase Your Limits
Your credit utilization ratio — the percentage of your overall credit that you’re using — accounts for 30% of your credit score. Generally, you want to keep this number below 30% to have a healthy credit score.
By increasing the amount of credit you have available, you’ll lower your credit utilization. Because opening a new account can ding your score, asking for more credit on your current accounts is usually better.
4. Keep Paying Down Your Balances
Make an action plan to pay down debt, and avoid adding new charges so you can continue to lower your credit utilization ratio.
Remember: Mortgage lenders want to see a healthy debt-to-income ratio, so paying down debt will increase the odds of your approval.
Even if you can’t get a traditional mortgage because of your credit score, there are still alternative ways to buy a house without credit.
But if you want to own a house, it might be in your best interest to keep paying off your debt and improving your scores. Think of all the money you’ll save in the long run.
Robin Hartill is a senior editor at The Penny Hoarder.