What credit score do I need to buy a house?
It depends on the type of mortgage loan you want
Your credit score plays a key role in determining what mortgages are available to you
We all want to own a home someday. Isn’t that the American dream?
However, it’s not often that buyers are ready to make full payment for a home at the time of purchase. Usually, they require mortgage loans to make their dreams of owning a home a reality.
In such situations, mortgage lenders will review the borrower’s credit report and credit score to identify their current financial standing. Their findings will determine whether or not the application is approved as well as the terms of the loan.
Noteworthy, however, is the fact that there are different types of mortgage loans, and they each have different minimum credit score requirements. Let’s examine the various types of mortgage loans as well as the ideal credit score to buy a house under each type.
1. Conventional loans
A conventional loan or mortgage is one offered by a private lender such as a bank, credit union, or a mortgage company. Such loans are neither offered nor secured by any government institution. They normally require a minimum credit score of 620; any score below that incurs higher interest rates and unfavorable terms.
However, as for the optimal credit score for this type of loan, a credit score from 671 upward is best. This guarantees much lower interest rates and more beneficial terms.
2. FHA loans
An FHA loan is a loan insured by the Federal Housing Administration and issued by an FHA-approved lender. These loans are normally arranged for borrowers with low or moderate incomes and are the go-to option for most first-time buyers.
Consequently, the minimum credit score required is as low as 500. However, in order to access the available benefits, a good credit score for an FHA mortgage is a score from 580 upward. Such scores avail borrowers of down payments as low as 3.5%, among other financing benefits.
3. VA loans
VA loans are mortgage loans offered by the US Department of Veterans Affairs. These loans allow veterans, service members, and spouses to purchase homes with great benefits such as:
- Super-favorable interest rates
- Zero down payments
- No private mortgage insurance
- No prepayment penalties
The program usually sets no minimum credit score requirement. Instead, the program’s approved lenders assess the person’s current financial standing, including credit scores. This helps them decide whether or not to grant the mortgage loan application.
Usually, lenders choose qualifying applicants whose credit scores are in the mid-600 range.
4. USDA loans
The U.S. Department of Agriculture has a federal government-supported mortgage loan program designed primarily for borrowers for whom a regular mortgage is out of reach because they aren’t wealthy enough. This program is named the USDA Rural Development Guaranteed Housing Loan Program; the loans are for rural homebuyers and require no down payments.
Though the program has no explicit minimum credit score, the USDA’s Guaranteed Underwriting System’s guidelines recommend a credit score of at least 640.
Having considered the various types of mortgage loans and their respective minimum credit scores, compare yours to figure out your ideal mortgage loan type. If your credit score falls below the noted minimums, you might have a hard time securing a mortgage. You can either focus on avoiding bad financial habits and building your credit, or get a co-signer whose credit is better than yours. Or both.
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