What Credit Score Do You Need to Buy a House?

Your credit score is a key factor in buying a home. Qualifying for a mortgage and getting the lowest possible interest rate can be difficult if your credit score is low.  Since a mortgage to buy a home is most often the largest loan most people will ever take on, it's a good idea to have some knowledge on how your credit score affects your home purchasing experience.  Overall, your credit score affects your ability to get a mortgage, the interest rate on that mortgage, and what you need to put down as a down payment.  However, there are a variety of loan options available to borrowers with different credit scores. When shopping for a mortgage, be sure to understand which score is needed to qualify for the best terms and conditions.  Before going any further, it's important to first get a sense of credit score ranges and what is considered to be a good score.

Credit Score Ranges

FICO is the most widely used credit score rating system by the three major credit bureaus: Equifax, TransUnion and Experian. It ranges from 300 to 850, with a higher score indicating a lower likelihood of being in debt and/or having high interest rates on loans.  Here are the ranges and what they mean:

What is the lowest credit score that is acceptable for a mortgage loan?

Mortgage lenders typically require a certain minimum credit score to qualify for a loan. This varies depending on the mortgage option you choose, but generally those with better credit scores receive lower interest rates and more choices in mortgage products. For example, if you had lent money to someone and they failed to repay you on time, you as a lender would be less likely to offer that person loans again in the future.  Mortgage lenders feel the same way.  Lenders are less likely to reject a loan application from someone with a good credit score, because they know the person will be able to repay the debt on time.

Here are some examples of credit score requirements for certain types of loans:

How to Find and Improve Your Credit Score

Obtaining your credit report is the first step in improving your credit score. After you have it, you can work to improve your numbers by making on-time payments, keeping a low balance on your cards, avoiding excessive borrowing and possibly getting external help to address inaccuracies in your report.  Here's how to get started:

1. Get your free credit report and FICO score.  All three credit bureaus (Equifax, TransUnion and Experian) offer a free credit report each year.  You can simply go to a website such as experian.com, transunion.com or equifax.com to get a copy of your Credit Report and FICO^® Score.  The scores between the bureaus may vary, so you may want to try getting a copy from all three.
2. Check for any errors that appear on the reports.  If there are some items on the report that are inaccurate and negatively affect your score, you may be able to dispute the errors and have them removed from your report, which will improve your credit score.  You may attempt to do this yourself, or you can get help from a reputable credit repair company that has a lot of experience in successfully getting inaccurate items removed.
3. Pay down any credit card balances to lower your credit utilization rate.  The more credit you have used within your credit limit, the high your credit utilization rate will be.  A high balance due on a credit card is considered as unpaid debt and has a negative effect on your credit score.
4. Avoid applying for other types of credit in the months before applying for your mortgage loan.
5. Keep paying your bills on time every single month.  Punctually paying off all of your bills in full every month has one of the biggest effects on improving your credit score.

How to Apply for a Mortgage Loan

After you've done your due diligence in optimizing your credit score and equipped yourself with some general knowledge of credit scores and types of loans, you're now in a good place to apply for a mortgage loan.

There are many ways to get a home loan. Some people prefer working directly with mortgage lenders or mortgage brokers. Others prefer to work with the bank or credit union where they have their other financial accounts. Credit unions may also offer programs to help with the costs of purchasing a home.

Credit unions are a popular choice for loans because of their focus on the community and their member-focused approach. They reinvest earnings back into the institution, distribute dividends to members, and support local nonprofits.

Mortgages from credit unions tend to stand out since they usually have lower upfront costs and interest rates, as well as flexible down payment options. Plus, credit union members often receive special perks and rewards that you won't find at other financial institutions.

Conclusion

Buying a home is an important milestone, and it can take some preparatory steps before you’re ready to take this step. If you’re looking to buy a home soon, follow our tips so that you're ready to apply for a mortgage by the time you find your perfect property.

Regardless of your credit score, there are many homes available for purchase. And even if your credit is not ideal when you buy, it's not a huge cause for concern.  If you improve your credit score later on after purchasing a home, you may be able to refinance your loan at a better rate.