Home Buying and Credit Scores: Everything You Need to Know

“What credit score do I need to buy a house?”

People ask us this question all the time. While there are advantages to having a high credit score (lower interest rates, for one), you don’t need to have great credit to buy a home. Even with poor credit, there are government-backed loans that can help you get the keys to your dream home. 

If you have a credit score of 620 or higher, you should be able to qualify for a mortgage. Some loans may require a score of 660 or higher, and for the best interest rates, we recommend having a credit score above 740. Don’t be discouraged if your score is low. You still have options even if your score is in the 500s, and there are plenty of ways to improve your credit. 

Let’s explore what credit you need for the most common loan types, and what steps you can take to improve your credit to get a better mortgage... 

Credit Scores for Loans

FHA Loans
Federal Housing Administration loans allow down payments as low as 3.5% if you have a FICO score of 580 or better. If your credit score is between 500-579, then you’ll be required to have a 10% down payment as the minimum. The credit scores for these loans are also at the discretion of the lenders, who can require higher minimums depending on the market and other factors. If you have any liens, judgments, or have loans or bills currently in collections, you’ll need these paid off before closing. These loans are sometimes a great option for first-time home buyers. 
Minimum Credit Score: 500

Conventional Loans
Conventional loans are mortgages that aren’t backed by a government agency. These loans aren’t limited to borrowers based on income, location, or military status. They usually require you to meet the income and down payment requirements that set by Freddie Mac and Fannie Mae. Depending on the loan amount and your financial status, you could get away with making down payment that’s as low as 3%, but we’d recommend putting more down if you’re able. 
Minimum Credit Score: 620, but usually you need a score around 660 or higher. 

VA Loans
Veterans Affairs loans are available for veterans, active-duty military members, and their eligible spouses. These loans don’t have government-set minimums, but the VA lenders themselves have their own credit score requirements. The average credit score of a VA home buyer in the beginning of 2020 ranged from 711-721. 
Minimum Credit Score: 640

USDA Loans
Feeling farmery? US Department of Agriculture loans don’t have a set minimum credit score. Much like the VA, these requirements are up to the lenders. 
Minimum Credit Score: 640

Jumbo Loans 
Jumbo loans are exactly what you’d expect: large loans that are offered when a regular mortgage isn’t enough. In King County, Washington, these loans are usually set aside for homes that cost more than $741,750. Jumbo loans finance properties that are too expensive for a conventional conforming loan. Because of the sheer size of the loan, jumbo loans are considered riskier for lenders and aren’t guaranteed by Fanne Mae or Freddie Mac, so if the borrower defaults, the lender isn’t protected. For these reasons, you need a higher minimum credit score to qualify. 
Minimum Credit Score: 700

Preparing Your Credit for a Loan

Are you worried that your current credit score won’t help you get the loan want? Don’t lose hope just yet. There are several easy ways that you can improve your score.

Analyze Your CreditStart by getting an annual credit report to discover your score, what credit cards you have open, and what could be having a negative impact on your credit. If you need to check it more often than once a year, you can get a free copy of your credit report every 30 days from Experian. 
Look for items you don’t recognize or for inaccuracies, which occur probably more often than you’d think. If you find inaccuracies, you can dispute them with the credit reporting agencies, but know that this process can take a while. However, if a dispute resolves in your favor, negative items will be removed and your credit score will increase. 

Pay Your Bills On TimeThis sounds easy, but roughly 25% of adults don’t always their bills on time. What’s worse - only a little more than half of US adults between the ages of 18-34 are paying their bills on time and have no accounts in collection. Forgetting to pay your bills on time will quickly damage your credit score and it’s easy to avoid. If you’re not paying your bills because you can’t afford them, you may have to find ways to cut costs to avoid a snowball effect. 

Pay Down Your DebtReducing your debt both lowers your debt-to-income ratio and usually improves your credit score (if you debt is credit card-related). 

Maintain a Low Credit Utilization RateYour credit utilization rate is your total debt divided by your total available credit. For example, if you have 2 credit cards open and a combined credit limit of $20,000 and a balance of $4,000 on them, then your credit utilization rate is 20% ($4,000/$20,000). We recommend having a credit utilization of 30% or less. Typically, the lower the better. 

Keep Cards OpenIf you’re thinking that you can improve your credit card score by closing out as many cards as you can, think again. Closing these cards reduces the amount of available credit that you have, reducing your credit utilization rate. Keep your cards open - especially the ones you’ve had the longest - and use them on occasion and pay off their balances when due. This will keep their issuers from closing your account for inactivity. 

Loans are Flexible
It can take some time to raise your credit score, and that’s okay. Nobody is perfect, but we can all make improvements. That’s why we want to highlight one more detail about the home-buying process: loans are flexible. 
You might have to start with a high interest loan when you first buy a house, but you can always refinance and change the terms of your loan when your credit and/or the market improves. Many people switch from 30-year to 15-year mortgages, or make similar decisions some time after they’ve moved into their new homes. Just know that there are always options available, and that there are people who can help you try to get the best deal.

Anthony Greer

Anthony Greer specializes in content writing and brand messaging development. You can learn more here: www.anthony-greer.com