What Credit Score is Needed to Buy a House?
Friday, December 21, 2018, 6:00 PM | Leave Comment
Are you looking to buy a house? Even if it’s still a while off, you’re probably starting to put together a plan for your home purchase.
If you haven’t started to look yet, you know it’s on the horizon. It’s always best to have a plan in place from the very beginning.
If you don’t already know how your credit score will affect the purchase of your home, you definitely need to. Your credit score can impact every aspect of your home loan.
These include the kind of loans available to you and the amount of money you can afford to borrow. Your credit score will also determine what specific loan terms may be offered to you.
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What Is a Credit Score and How Does it Work?
While there are different credit scoring models, FICO is the most widely used and is a three-digit number, between 300 and 850. The higher the number, the better your score, with a good credit score starting at 670.
Your credit score is created by pulling information from your financial history about how you spend money. Here’s the breakdown of the factors used in the process.
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Payment history—This is all about paying your bills on time. It makes up the majority of your credit score equation, at a whopping 35 percent.
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Debt—The amount of debt you have in relation to your available credit. It’s 30 percent of your credit score’s equation.
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Credit history—Worth 15 percent of your credit score, this has to do with the length of time you’ve had an established credit line.
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Recent credit—This is about how you’ve been spending money recently, and accounts for 10 percent of the equation.
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Types of credit—Also worth 10 percent of the equation; this focuses on the different kind of credit lines you have open.
Credit score ranges fall into the following categories:
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Very Poor—300–579
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Fair—580–669
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Good—670–739
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Very Good—740–799
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Exceptional—800–850
The majority of credit scores are between 600 and 750. Why does your potential lender need to look at your credit score? To get an indication of whether or not you are a good lending risk.
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What Credit Score Do You Really Need to Purchase Your Home?
It would be nice if there were a single number to aim for when planning to secure financing for a home purchase. Unfortunately, there are many factors that come into play when it comes to acquiring your loan.
First, the type of loan you decide to move forward with will influence the credit score you need to have. Your credit score will limit or expand which loans are available to you. Interestingly, so will the kind of home you’re looking to purchase.
You’ll also find that lenders will likely be looking at why your credit score is the way it is. Even good lending risks can make mistakes.
Has a divorce, a business collapsing, or a lengthy illness left your credit score a little lackluster? Don’t panic—lenders may still be willing to work with you.
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Borrowing Options and Required Credit Scores
Different types of loans require a different credit score for approval. Are you just beginning to look at your options? Here are some common loan types and what you can expect to need from your credit score to be approved.
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FHA Loan: Score of 580 and Up
An FHA loan is affiliated with the US Federal Housing Administration. It’s available through FHA-approved lenders. While you may be able to secure an FHA loan with a credit score of less than 580, it’s not likely.
FHA loans are not conventional loans and are geared toward new homeowners. The FHA loan requires that the home be owner-occupied for at least one year.
This loan type may require less of a down payment. On the other hand, borrowers will be expected to pay additional monthly insurance, known as private mortgage insurance (PMI).
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VA Loan: Score of 620 and Up
A VA loan is available to veterans, active military members, reservists and, on some occasions, surviving spouses. The VA loan is backed by the United States Department of Veterans Affairs (VA).
The VA does not originate these loans. They are, however, responsible for outlining who qualifies and sets the regulations for borrowers.
The VA loan is designed to avoid penalties like the PMI found in other similar types of loans. This can be a great option for those associated with the military.
To qualify for a VA loan, you should plan on having a credit score of 620 or higher. Although some may provide VA loan options for 580 or higher, most require the greater credit score.
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USDA Loan: Score of 640 and Up
A USDA loan is a possibility for people in rural areas looking to buy a home. It’s offered through the United States Department of Agriculture.
These loan programs were designed to help families involved in the agricultural industry have access to appropriate housing. Enabling homeowners to afford quality housing in agriculturally-dominated areas helps to make agriculture a viable career option.
To qualify for a USDA loan, you should expect to have a credit score of 640 or better. You also need to show that you can afford the expected monthly mortgage payment.
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FHA 203K Loan: Score of 640 and Up
The FHA 203K loan is a great option for people looking to buy an older home in need of repair work. Like the standard FHA loan above, it’s offered through the Federal Housing Administration. The FHA 203K provides funds for both the cost of the purchase of the house and those needed for repairs.
An FHA 203K loan comes with many perks, including low down payments and both adjustable and fixed-rate options. They aren’t without their drawbacks though.
FHA 203K loans are not available for investment properties. Additionally, you’ll need to hire licensed professionals to do all of the renovation work.
If you’re interested in a property that could benefit from an FHA 203K loan, you’ll need to have a credit score of at least 640.
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Conventional Loan: Score of 640 and Up
A conventional loan is also known as a conforming loan. These loans follow guidelines created by Fannie Mae and Freddie Mac.
A conventional loan is different from the previous loans discussed here because it’s not government-backed at all. Instead, these loans are provided by private lenders.
After the initial house sale transaction, these mortgages are frequently sold to Fannie Mae and Freddie Mac.
Conventional loans are a great option for any type of property. With these, you are not limited by the guidelines of a government organization.
It doesn’t matter if you’re looking for investment properties, urban homes, or fixer-uppers where you do all the work yourself. These are all solid options when it comes to a conventional loan.
With a conventional loan, you’ll also face a lower PMI. If you put at least 20 percent down at the time of purchase, you can even avoid PMI altogether.
Conventional loans can be harder to qualify for, though, and you should expect to have a credit score of 640 or greater to qualify.
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How to Whip Your Credit Score Back into Shape
Unhappy with your options for home financing? The sooner you get started making improvements on your credit, the better off you’ll be.
None of these suggestions will be a quick fix for your credit score. But even a few small, smart, changes can make a big difference in how others view you as a lending risk.
Start making adjustments today. By the time you’re ready to purchase your home, your credit score can be showing off your hard work.
Aren’t sure where to begin? Here are some tips for getting your credit score back where it should be.
Make repayments on time or early. Showing your potential lenders, you’re responsible about money starts with having a record that involves making timely payments.
Pay down your credit cards. Make an effort to spend only what you make and bring down your used-to-available credit ratio.
Avoid making dramatic purchases. Be as consistent and reliable as possible when it comes to where and how you use your credit lines.
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How to Work Around Bad Credit
Making steps to improve your credit is a great place to start. What if your credit score hasn’t fully recovered by the time you go to purchase your home? There are a few things you can do to improve your odds of securing funding.
Put down a greater sum of money during the purchase. Saving up a large deposit means you’ll need to borrow less and shows you’re capable of handling your money responsibly.
Work with someone local. Small businesses can be much more understanding of blights on your record, even more so if they’re working with and investing in their own community.
Look for a cosigner. If you have someone with good credit who can cosign a loan with you, this can help. With a cosigner, lenders may be willing to look beyond a problematic credit history.
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Your Credit Score and Your Future as a Homeowner
It’s never too late to put your credit score in order. Maybe you’ve been putting it off because you didn’t realize how important it was. Or perhaps you weren’t sure where to begin. Now’s the time to get started.
It’s true that there’s not one single credit score that can guarantee you the house funding you need. It’s also true that the better your score is, the better off you’ll be.
Don’t let your credit score hold you back. Start working toward the score you need to get you in the home you deserve.
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John Blakely has had a passion for all things personal finance for over a decade. He is a firm believer in having big financial dreams and executing on a plan to realize them. He is an Education Ambassador for ScoreSense, where you can find more of his writings.
