Purchasing a home typically represents the largest financial investment families make. That’s why lenders take a long look at a mortgage applicant’s credit score, among other factors, to assess whether they can afford the loan and responsibly pay it back on time.
First-time home buyers always want to know what credit score is needed to buy a house. The answer to that question can be more complicated than first-time home buyers might anticipate. Thoroughly understanding “what credit score is needed to buy a house” involves knowing FICO score ranges, understanding what it takes to qualify for specific loan programs, and circling back to improve your credit score before applying for a mortgage. The following information can help you align your credit score with the best possible mortgage opportunity available, getting you one step closer to achieving the American Dream of homeownership.
A lender will consider a wide range of factors when approving or denying a mortgage. Debt-to-income ratios indicate whether the mortgage is affordable. From a lender’s perspective, that helps decision-makers calculate the risk of default.
People who earn a reasonable salary and keep their bills low can typically afford to borrow more. The result is usually that low debt-to-income ratios help support purchasing larger homes and those in select neighborhoods.
But the credit score remains a driving factor that influences the interest rate, and terms qualified borrowers receive. A credit score of 640 or higher helps potential homebuyers qualify for a wide range of loan programs. People who come to the mortgage table with a credit score exceeding 700 possess the leverage to secure among the lower-interest products within programs. Truth be told, even a fraction of an interest rate reduction can save homeowners thousands over the life of the loan. Consider the following example.
A truck driver wishes to purchase a $300,000 home and has already saved a $60,000, 20-percent down payment. The trucker likes the idea of low monthly installments and applies for a 30-year fixed-rate mortgage for the $240,000 single-family residence. The cash-flush trucker has few bills, consistently pays them online, and enjoys a credit score of 790. Those factors earn the commercial vehicle operator a 4 percent interest rate and a monthly payment of about $1,160.
Let’s say the same trucker doesn’t possess quite as high of a credit score. At 680, the professional driver might qualify for the same loan program, but at 4.5 percent. The monthly installment would probably tick up around $1,216 over 30 years. The increase of $744 annually balloons to more than $25,000 over the life of the loan. That’s how significantly your credit score can impact your mortgage payment.
There is not one answer to the question, “What credit score is needed to buy a house?” Homebuyers need to understand the correlation between that three-digit number and what mortgage programs are available to them.
There are proven ways to increase a credit score in 30 days that will help you gain access to not only a higher score, but also to lower rates and favorable terms. But it might be unrealistic to improve it 200 points immediately without dramatically changing your spending habits, credit utilization, and debt-to-income levels, among other factors. Any effort you invest towards increasing your credit score could pay dividends when it comes to qualifying for one of the following home loan types.
Qualifying for a conventional loan usually calls for a credit score of 620 or higher and a debt-to-income ratio below 36 percent. A borrower with a credit score of 720 or higher may be eligible for reduced down payment requirements and attractive interest rates.
The Federal Housing Administration may back the loans of qualified borrowers with credit scores as low as 500. This flexible loan program typically allows homebuyers to put down 10 percent, and a 50 percent debt-to-income ratio may be acceptable. Lenders may possess the discretion to offer FHA loans with lower down payments for borrowers with a credit score of 580 or higher.
The U.S. Department of Veterans Affairs does not necessarily require a particular credit score to back the mortgages of qualified military personnel, veterans, or surviving spouses. However, lenders generally require a credit score of 580 to 660 to approve VA loans.
The terms “FICO Score” and “credit score” are largely interchangeable. Some confusion does persist among consumers who discover three different numbers have been assigned to them.
The FICO score system was created by engineer Bill Fair and mathematician Earl Isaac in 1956. Its name is essentially an acronym for the Fair, Isaac, and Company. The inventors sold the rights, and it eventually emerged as a standardized system used to assign a three-digit number to consumers. A FICO score represents an impartial assessment of someone’s creditworthiness based on metrics involving repayment history, credit utilization, age of accounts, and others.
The establishment of major credit bureaus — Equifax, Experian, and TransUnion — resulted in people receiving three different numbers, or credit scores. Although each credit organization bases its score on FICO principles, the data they use can differ.
Lenders are not necessarily bound by one or all of the FICO scores. Some lenders, like your local trusted credit union, may have more flexible criteria. Some lenders may prefer one bureau over another or consider the three scores holistically. While your credit score carries significant weight in securing a mortgage, other factors are also compelling. However, higher credit scores usually open opportunities for lower interest rates and the most favorable mortgage terms.
Potential homebuyers are often stunned at how easily they can improve a credit score. Once you understand how the FICO score system functions, simple adjustments to your financial portfolio can increase the three-digit number. And that credit score improvement results in thousands of dollars in savings over the life of a home loan. These are strategies that can improve your credit score.
Along with clearing up errors and paying off credit cards, consider focusing on improving your debt-to-income ratio. Along with a solid credit score, lenders weigh how large a mortgage payment community members can realistically afford. Many of the promising home loan programs establish debt-to-income thresholds for this very reason.
Before applying for mortgage pre-approval, tally up your existing debt and strategically pay accounts down. For example, make sure your available line of credit accounts are below 50 percent. A low debt-to-income ratio, coupled with an improved credit score, helps borrowers gain mortgage approval for the lowest possible mortgage interest rates and preferred terms.
If you are considering purchasing your dream home, get pre-approved for an affordable mortgage at Allegiance. If you are unsure about your unique financial situation, check out our mortgage calculators or contact our mortgage experts today.
To improve your credit score, explore our Credit Builder Loan, Credit Builder Credit Card, and be sure to access our free financial coaching options.