Could you buy a house today if you wanted to? The answer to that question hinges on one critical number: Your credit score. Depending on a few other factors — the type of mortgage loan and where you want to buy, for example — you might not even need to save up much of a down payment if your credit is in the right place.
Your credit score influences both your borrowing ability and your interest rate. Michael Simpkins, a Florida agent with 21 years of experience, explains that
“There are credit score levels that lenders have set. Depending on who they’re working with, a credit score could change the interest rate because it changes the risk.”
If you want to buy a house but are concerned about your credit score, here’s everything you need to know about the minimum credit score to buy a house.
What, exactly, is a credit score?
Financial decisions that you’ve made along the way, everything from opening a checking account when you were 14 to paying your cable bill late, contribute to a credit score. The score reflects a lifetime of financial management — or mismanagement.
There are three major credit bureaus; Experian, Transunion, and Equifax. Your credit score can vary slightly between them because not all companies will bother to report negative information to all three. That’s why, even though you may be more familiar with a credit score, lenders use a FICO score instead.
Lenders use your FICO score, created by and named after the Fair Issac Corporation, because its formula remains consistent. Joe Tafolla, a top-rated mortgage broker in the Seattle area, tells buyers that “credit scores are important to lenders because they are directly correlated with the likelihood of the buyer being able to follow through with the commitment of repayment.”
Credit and FICO scores can fall between 300 and 850, with a higher score considered better. These are the typical ranges scores can fall into;
- Less than 580 – considered poor
- 580-669 – considered fair
- 679-739 – considered good
- 740-799 – considered very good
- 800-850 – considered excellent
If you want to buy a house, but have a low credit score, it’s helpful to know what you could do to improve it. Some factors impact your score more than others. Knowing what matters most can point you towards quick fixes or tell you where to focus your energy.
What goes into a credit score?
According to FICO, your payment history makes up 35% of your score, so if your cable company reported that late payment, it hurt you. The best thing you can do now is plan to pay everything on time going forward.
Credit utilization is the next-biggest factor. This is the amount of your current available credit that you’re using. A simple example would be if you have a credit card with a $15,000 limit, and you’ve charged $7,500 to it. Your credit utilization is 50%. FICO calculates this ratio across all your open credit accounts, and if your utilization is too high, it’ll ding your score.
Tafolla says that “Some people may have perfect payment history but have maxed out their cards and thus the credit score is suffering. Those are the scores that are easy to fix; once the balances are paid down the scores pop up quickly.” Credit utilization could be your biggest negative, and paying down balances could give your score the boost it needs.
Credit history, or age, is 15% of your score, and it’s not something you can really impact. The longer you’ve had open accounts, the better your score. While you can’t go back in time and open a checking account as a teenager, you should avoid closing any older accounts. If they drop off your credit report, it’ll hurt your score.
The mix of credit you’ve taken out contributes 10% to your score, as well. Not all credit is viewed equally. Lenders view a credit card, that has nothing to secure it, differently than an auto loan, which has physical property as collateral. Too much unsecured debt drops your score, but oddly, a complete lack of debt also damages it.
Lenders want to see how you handle owing money, so if you’ve always paid cash for your purchases, that could lead to a low score. It may sound strange, but you might have to open a credit card, charge expenses, and then pay them off to help your credit standing.
The last 10% of your FICO score consists of new inquiries. Every time you apply for a new credit card or auto loan, it shows on your report as a credit inquiry. Why? Because if you’ve been running around town opening up new accounts, it tells lenders that you might be having money issues. It’s a red flag for them — which is why you should avoid buying a new car or applying for a new card when you’re also home shopping.
How low can it go? The minimum amounts
It’s hard to pin lenders down on the exact credit score that would disqualify you for a mortgage, partially because other factors do impact their lending decision. While there are no official set minimums for VA or USDA loans, lenders usually won’t accept applications from people with credit scores under certain levels.
You’ll need a score above 500 to get approved for an FHA loan with 10% down. If you only have a 3.5% down payment, your score should be 580 or higher. This is also the minimum score recommended when applying for a VA loan.
Most conventional loans require a minimum credit score of 620, and a score above 640 is recommended for USDA loans. These minimums are flexible, if, for example, you have a sizable down payment. But you will always pay more if you represent higher risk. Even if you could get approved for a loan, you’d pay a high interest rate.
What’s ‘average’ look like?
Are you curious about the “average” score for a first-time homebuyer? Maybe you’re wondering where you fit, and whether you have a score above the minimum credit score to buy a house in your area.
Nationwide, in one study of first-time homebuyers, the average score came in at 684 — but this varies by both state and city. Homebuyers in Mississippi and Alabama had the lowest scores in the nation, 662 and 668, respectively, whereas those in Washington D.C. had the highest average scores of 730.
There is a difference of roughly $278,000 between the average first-time mortgage amount in these states, which also helps explain the gap in credit scores. If a first-time home costs considerably more in one area than another, the first-time homebuyer in that area will need to be more financially stable to buy.
The minimum credit score is …
If you have a high enough down payment, you can probably get a mortgage loan even with poor credit. But even then, “the bank may ask for larger amounts, like 20% to 25% down, because it lowers the risk level for the bank,” Simpkins explains. At some point, waiting would be the better financial choice, as you’ll be paying that interest rate for the next 30 years unless you refinance.
Improving your credit will give you a better deal, so think about taking a few months to a year to clean it up before home shopping. Tafolla points out that “great, good, and poor credit come in all shapes and sizes.” Depending on the reason you have a low credit score, fixing it could be easier than you think.
Talk to a licensed loan officer about your options for a home loan with your current credit score, and how they could expand if your score improved. They might be willing to offer advice and help you improve your score to gain your business. Simpkins found a lender willing to work with one of his clients who had a credit score “somewhere in the range of about a 590. We got their credit score all the way to about a 670 literally in a matter of three weeks by paying off a couple of small debts that were well below $500.”
Learning about your credit score gives you the power to improve it, and eventually qualify for your dream home. Educate yourself to take control of your future.
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