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This content is for informational purposes only and is not intended to provide financial or legal advice.
You might only begin to consider your credit score when you look for a new home. But the required credit score to buy a home is essential if you want to reduce the amount of money you pay the lender in interest.
You will find it easier to get a mortgage with lower monthly payments with an excellent credit score.
But even if you don’t have the ideal credit score, it’s still possible to secure the mortgage you need. If you have had some financial issues in the past, knowing the lowest credit score to buy a house will be vital.
Maximum Real Estate Exposure has some excellent information for first-time homebuyers. Let’s look at some of the most crucial things to know.
What is the Minimum Credit Score to Get a Mortgage?
With any mortgage, lenders set their own requirements. And if you’re close to the minimum possible, you might struggle to be approved. With government-backed loan types, lenders are already prevented from accepting applicants below a specific credit score. Often lenders will require more than the minimum, however.
Let’s look at the most common mortgage types and their minimum scores:
FHA Loans
Operated by the federal housing administration, their absolute minimum credit score is 500 if you have a down payment of 10% or more. The minimum down payment of 3.5% is possible with a credit score of 580. Many lenders, however, will look for higher credit scores for the majority of borrowers.
VA Loans
The program operated by the US Department of Veterans Affairs for current and former military personnel has no minimum credit score requirement. Most lenders, however, will want to see a credit score in the 600’s.
USDA Loans
The US Department of Agriculture has a program to help low and medium-income families in rural areas. If you are in a qualifying area, they have no minimum credit score requirement. However, with a credit score over 640, you will find it a lot easier to get your mortgage approved.
Conventional Loans
These mortgages are not part of any government program. Fannie Mae and Freddie Mac underwrite them, and so they must meet their guidelines. This means a minimum credit score of 620 is necessary when applying for a conventional mortgage.
These required credit scores are the absolute minimum possible, and you should aim to have a credit score higher than the minimum before applying for a home loan.
COVID-19 has also increased the minimum requirement from lenders. This has happened because of increased applications and the heating of the market.
What is Considered a Good Credit Score to Buy a Home?
FICO breaks down credit scores into five categories, giving you a rough idea of what is considered good when applying for finance.
- 800 or more is considered exceptional
- 740 to 799 is very good
- 670 to 739 is good
- 580 to 669 is fair
- Under 580 is very poor
Even if you have a great credit score, you shouldn’t assume you will get the mortgage you want. Lenders factor in many other things when they look at your application. For example, if you have a lot of debt compared to your income, you might find it challenging to have your home loan approved no matter what your score.
Before applying for mortgages, you should ensure your credit score is at least in the “good” range. If you want to reduce your interest payments, you should try to push your score into the “very good” range with at least 740.
Here are some other key things to know about credit scores.
Credit Scores and Interest Rates: How Much of a Difference Does it Make?
When applying for a mortgage, your credit score will have a significant impact on how much interest you’ll pay on the loan. To give you a better understanding of how much your credit score affects this, FICO publishes data showing average APR and what you are likely to pay monthly on your home loan.
Let’s look at an example from February 2022 on a 30-year fixed rate mortgage for $250,000:
- 760 to 850; 3.338% and $1,100 per month
- 700 to 759; 3.560% and $1,131 per month
- 680 to 699; 3.737% and $1,156 per month
- 660 to 679; 3.951% and $1,186 per month
- 640 to 659; 4.381% and $1,249 per month
- 620 to 639; 4.927% and $1,331 per month
As you can see, there’s a big difference between having an exceptional or very good credit score and one that is at the lower end of what is required by lenders.
The difference between the monthly payments for the best and worst credit scores of over 1.5% and $231 per month will cost a lot over the 30-year mortgage. This difference could cost you more than $60,000 over 30 years and around $15,000 in the first five years of the home loan.
Fortunately, you can avoid some of these increased interest payments if you improve your credit score before getting a mortgage.
Credit Scores Affect All Walks of Life
Your credit score doesn’t impact just buying a home. You will find that your score will matter when buying a car, getting a credit card, and even when getting home or car insurance. A low credit score can make the cost of everything more expensive.
Given the importance of your credit scores, let’s look at some of the best ways to improve them.
Improving Your Credit Score
The first step in improving your credit score is to check for problems in your report. This can be done for free at the AnnualCreditReport.com website. Because of the pandemic, you can do this once per week instead of once per year. Look for any obvious mistakes in your records and contact the credit bureau if you find anything wrong.
It would be best to ask your credit card issuer or your bank for your credit score. There are some score monitoring services that you can use for free, like Credit Karma.
Payment History
One of the significant factors in your credit score is timely payments. If you have made late payments, this will drag down your score. If you consistently avoid late fees, it will still be some time before your credit score will recover.
Credit Usage
If you max out your available credit all the time, this will hurt your score. Credit utilization also plays a big part in your overall score. Generally, using less of your available credit is better and should boost your score.
Credit Age
Somewhat less important is how long you have had credit available. Avoid closing old credit accounts to help maximize your score. This will also help with credit utilization as you will have more credit available.
Applying for new credit will also affect your score negatively in the short term. The mix of different credit types you have available is another factor, though both of these are relatively minor compared to payment history and how much credit you use.
Improve Your Credit
While you can apply with the lowest credit score to buy a house, it isn’t advisable. There are many things you can do to improve your credit score and save a lot of money on a home loan.
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