What to Know About Credit Scores When Buying a House

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By Bill Gassett Updated June 14, 2023


What to Know About Credit Scores When Buying a House

Buying a home is an exciting milestone in many people's lives but requires careful financial planning and consideration. One of the crucial factors lenders assess when determining your eligibility for a home loan is your credit score.

Your credit score reflects your financial history and indicates your creditworthiness. We will delve into the significance of credit scores when purchasing a home and discuss the necessary credit score for a home purchase.

Understanding Credit Scores

A credit score is a numerical representation of an individual's creditworthiness based on their credit history. Lenders rely on credit scores to evaluate the risk of lending money to borrowers. The most commonly used credit scoring model is the FICO score, which ranges from 300 to 850.

A higher credit score generally indicates a lower risk for lenders, making securing favorable loan terms and interest rates easier.

Credit Score Needed to Buy a House

The credit score needed to buy a house can vary depending on the loan program and the lender's requirements. While there is no fixed minimum credit score for all home loan types, a good credit score significantly improves your chances of obtaining a mortgage with favorable terms.

Generally, a FICO score of 620 or higher is considered the minimum threshold to qualify for most conventional mortgage loans.

Necessary Credit Score for a Home Purchase

Different loan programs have varying credit score requirements. Let's explore the credit score thresholds for some common home loan options:

Conventional Loans

The government does not insure or guarantee conventional loans. A credit score of 620 or higher is typically required to qualify for conventional mortgages. However, a credit score of 740 or above is desirable to secure the most competitive interest rates and terms.

FHA Loans

Backed by the Federal Housing Administration (FHA), these loans are popular among first-time homebuyers. FHA loans generally have more flexible credit requirements, allowing borrowers with credit scores as low as 500 to qualify. However, a higher credit score, preferably above 580, may enable you to qualify for lower down payment requirements.

VA Loans

VA loans are available to eligible veterans, active-duty service members, and surviving spouses. The U.S. Department of Veterans Affairs does not establish a minimum credit score requirement for VA loans. However, most lenders impose a credit score benchmark of around 620 to 640.

USDA Loans

USDA loans are designed to assist low-to-moderate-income borrowers in purchasing homes in rural areas. Like VA loans, the U.S. Department of Agriculture does not set a minimum credit score requirement, but lenders often expect a score of 640 or higher.

The lender you choose can also have some bearing on your loan terms.

Improving Your Credit Score

Suppose your credit score is lower than the desired range for a home loan. In that case, you can take several proactive steps to enhance your creditworthiness and increase your chances of qualifying for a mortgage with favorable terms.

Here are some detailed strategies to improve your credit score to buy a house:

Pay Your Bills on Time

Making timely payments is one of the most vital things to do if you're looking to improve your credit score. Paying all your bills, including credit card payments, loans, and utilities, by their due dates demonstrates financial responsibility and reliability.

Late payments can significantly negatively impact your credit score, so it's essential to prioritize timely payment of all your obligations.

Reduce Your Credit Card Balances

Another effective way to improve your credit score is to lower your balance. The credit utilization ratio, the percentage of your available credit currently used, is a significant factor in credit scoring.

Aim to keep your credit utilization below 30% of your available credit. Paying outstanding balances can decrease your credit utilization ratio and potentially boost your credit score.

Minimize New Credit Applications

Opening multiple new credit accounts quickly can raise concerns for lenders and negatively impact your credit score. When applying for new credit, lenders conduct hard inquiries on your credit report, temporarily lowering your score.

It's advisable to avoid applying for new credit cards or loans before applying for a mortgage. Instead, focus on maintaining and managing your existing credit accounts responsibly.

Check Your Credit Report For Mistakes

Regularly reviewing your credit report is essential for understanding your financial standing and identifying any errors or discrepancies that may negatively affect your credit scores.

You are entitled to one free credit report yearly from each of the three major credit bureaus: Experian, Equifax, and TransUnion.

Visit annualcreditreport.com to access your reports. Carefully examine the information on your report, including account balances, payment history, and personal details. If you find any inaccuracies or inconsistencies, promptly report them to the respective credit bureau to have them corrected.

Doing so will be a significant step in getting your credit scores fixed.

Final Thoughts

When buying a home, your credit score significantly determines your loan eligibility and interest rates. While your specific credit score requirements vary based on loan programs and lenders, maintaining good credit scores above 620 is generally advisable.

However, the higher your credit score, the better your chances of securing more favorable mortgage terms. Understanding the importance of credit scores and improving your creditworthiness can enhance your prospects of successfully purchasing your dream home.

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