Many factors come into play when applying for a mortgage. Lenders weigh your credit score heavily because it demonstrates your ability to repay loans on time. Most people understand that good credit increases the chance of qualifying for a low-interest mortgage, but what credit score do you need to buy a house? The answer depends on the type of mortgage you’re seeking.
What Determines Your Credit Score?
There are lots of ways to calculate a credit score. That’s why the number may vary slightly on your credit report from each of the major national credit reporting agencies—Equifax, Experian, and TransUnion. The most sophisticated and well-known credit scoring method is the FICO Score. FICO, developed by the Fair Isaac Corporation, compiles variables from all three credit reporting agencies to calculate your score. These variables and their corresponding significance include:
- Payment history (35%)
- Total debt owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New lines of credit (10%)
Minimum Credit Scores by Mortgage Type
Your credit score, which lands somewhere between 300 and 850, indicates your creditworthiness. Anything below 630 is considered bad credit, while a score above 720 means you have excellent credit. Here’s a look at what credit score is needed for different types of home loans:
- Conventional home loans follow the standards set by Fannie Mae and Freddie Mac and are not insured by any government agency. Therefore, your application may be denied if your credit score is lower than 620. Conventional loans are typically best for homebuyers with good or excellent credit and offer the lowest interest rates and most flexible repayment options for those who qualify.
- FHA home loans are insured by the Federal Housing Administration. As such, they are less risky for lenders and easier to qualify for than conventional loans. You’ll need a minimum credit score of 580 if you make a down payment of just 3.5%. If you put down at least 10%, you may qualify for an FHA loan with an even lower credit score.
- VA home loans are backed by the Department of Veterans Affairs and require no down payment, making them a viable option if you’re a military service member, veteran, or qualifying spouse. There is no industry-set minimum credit score, but most lenders want to see a score of 580 or higher.
- USDA home loans are backed by the Department of Agriculture’s Rural Housing Service. To qualify, you must buy a rural or suburban home and earn below 115% of the area median income. Some lenders accept credit scores as low as 620, but a score of 640 or higher is ideal.
Can You Get a Mortgage with Bad Credit?
It’s possible, though more complicated, to qualify for a mortgage if your credit score is below the minimum requirement. After all, poor credit demonstrates that you tend to rack up debt or miss monthly payments, making you a riskier borrower. To help offset this risk, lenders may charge a higher interest rate or require a larger down payment. As a result, you may qualify for a mortgage with bad credit, but you’ll have to pay more for it.
How to Improve Your Credit Score Before Applying for a Mortgage
If your credit score isn’t up to par, you may need to give it a boost before buying a house. Here’s how:
- Pay off existing debt: As your debt responsibilities go down, lenders view you as less risky.
- Make all payments on time: A late payment on a credit card, student loan, or car loan could send your credit score plummeting by 100 points or more. On the other hand, on-time payments slowly grow your score as you prove that you’re a responsible borrower.
- Don’t open or close lines of credit: Refrain from changing your credit line situation before applying for a mortgage because opening and closing accounts could lower your score.
- Check your credit report for errors: Any mistakes from one of the three credit reporting agencies could mar your score. Check your report for free once a year and correct any errors you find.
- Become an authorized user: Having a family member add you to an existing credit card account can help boost your credit score. Just make sure you don’t run up debt or make late payments.
What Else Do Lenders Consider?
As you’re taking a few months to improve your credit score, consider what other factors affect your mortgage application. You may be able to make improvements in these areas as well to further increase the likelihood of qualifying for a low-interest home loan.
- Income and assets: Lenders want to see a predictable income and healthy savings account, which shows you can afford to make mortgage payments.
- Debt-to-income ratio: It’s in your best interest to have a debt-to-income ratio of 50% or lower, meaning your recurring monthly debts equal less than half of your monthly income.
- Down payment amount: The larger your down payment, the more likely you’ll qualify for a mortgage with a lower interest rate.
- Employment history: Lenders like to see a steady employment history—that is, working at the same job, or at least in the same industry, for the past two years.
Get Pre-Approved for a Mortgage Today
At Financial Concepts Mortgage, we want you to succeed. That’s why we encourage you to improve your credit score before applying for a home loan. If you’re not sure what type of mortgage is right for you, our outstanding lending professionals can walk you through your options. Please contact us at (405) 722-5626 or begin the pre-approval process online today. We are proud to be a locally owned mortgage bank serving Oklahoma, Texas, Kansas, Arkansas, and Alabama.