March 22, 2023

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First-Time Home Buyer? Here’s to Know What Credit Score You Need

If you’re looking to get a mortgage for your home, good credit is one of key factors that lenders look at when deciding whether or not to approve you for a loan.

For this reason, it’s important for buyers to try and get their score in shape before applying.

But, how good is good enough?

If you’ve found yourself wondering what credit score is needed to buy a house, you’re in the right place. Keep reading below for our definitive guide on homebuying and credit. We’ll explain why good credit matters, what scores will get you in the door, and what you can do to improve your score.

Why your credit score matters

Simply put, mortgage companies look at your credit history as an indicator of how likely you are to keep up with your mortgage payments.

Let’s face it: mortgages are huge loans, often worth hundreds of thousands of dollars. In the lender’s view, if you’re unable to consistently make payments toward smaller debts – like credit cards or a car loan – then it’s unlikely that you’ll handle a mortgage payment, as well.

But, it’s not just about making payments.

Your overall credit score involves the following factors:

  • Payment history: Have you consistently pay on time? Do you pay at or above the minimum payment?
  • Public records: Are there any matters of public record against you, like declarations of bankruptcy, judgements, or liens?
  • Length of history: Is your credit history long enough for the mortgage company to get a sense of how likely you are to repay?
  • New accounts: Have many new accounts been opened recently? Are you taking on lots of new debts?
  • Number of accounts: Are you balancing an unusually high amount of debt from other sources? Are they large enough to potentially take priority over the loan?
  • Recent inquiries: Have a number of other creditors inquired about your score?

Your rating in all of these factors will affect whether or not you’re approved for the loan and will also impact which loan programs are available to you and the interest rates you’re offered.

Credit score requirements

Though multiple types of credit scores are available, lenders commonly use your FICO score because it takes into account your files at each of the three major credit bureaus, ExperianEquifax, and TransUnion. FICO scores range from 300 and 850. The higher your FICO score, the higher your creditworthiness.

As for what credit score is needed to buy a house, that depends on the type of loan you are looking for.

These days, buyers typically choose between two main options:

1. FHA Loans
FHA loans offer buyers with a credit score of 580 or above the chance to buy homes at 3.5% down. (In certain loan programs, buyers with a score between 500-579 may also be approved with 10% down.)

These loans are backed by a guarantee from the Federal Housing Administration that the mortgage lender will be repaid, even if the buyer defaults on the loan. This allows lenders to take more risks with their approvals.

However, in exchange for the relaxed qualifying standards, these loans are subject to other requirements such as satisfactory appraisals and the purchase of private mortgage insurance.

If you’d like to learn more about whether a FHA loan might be right for you, we’ve got a deep dive on these loans in this post.

2. Conventional Loans
Those with a credit score of 620 or above may qualify for a conventional loan with down payments ranging from 5%-20% of the purchase price.

In exchange for the tougher qualifying standards, these loan programs often offer some of the best interest rates available and have more flexible terms than their FHA counterparts.

Additionally, they’re not subject to the same requirements as FHA loans.

Buying with less-than-stellar credit

If your score isn’t up to snuff quite yet, don’t give up hope. There are still other options you can look into in order to become a homeowner.

Obviously, each one has its own pros and cons, and it’s important to thoroughly research these paths before deciding what’s right for you.

However, you may want to consider the following:

  • Take the time to improve your credit: Most lenders are happy to work with clients on an individual basis to help them improve their score. They can look at your unique financial situation and help you come up with a step-by-step plan for tackling your debts. That said, a good place to start is making sure that you meet your due dates every month and pay as much above the minimum payment as possible.
  • Consider a portfolio loan: Sometimes small, local banks aren’t subject to the same strict qualifying standards as nationwide brands. Portfolio loans, where the loan is kept in-house rather than eventually being sold out to a larger competitor, allows the local bank to make a case-by-case determination on who qualifies.
  • Find a co-signer: If you can’t qualify for a loan on your own, you may need to add a co-signer to provide the lender with added reassurance. That person would accept responsibility for paying the loan, in the event that you default.

This article originally appeared on OpenListings.