Credit scores generally range from a low of 300 to a high of 850. The Federal Housing Administration guarantees loans with credit scores as low as FICO 500, with a 10% drop, while a score of 760 or higher qualifies you for the lowest mortgage rates available. regardless of the loan product.
Sticking to a low interest rate can save you thousands of dollars in interest over the life of the home loan and reduce your monthly payments. Here’s a look at the credit score you’ll need to buy a home in 2023.
Read more: How to buy a house in 2023?
What is your credit score required to buy a house?
There are five main types of mortgages, each with different qualifying minimum credit scores.
conventional loan
Conventional loans are the primary mortgages offered by most lenders. You’ll generally need a credit score of 620 or better to qualify. First-time home buyers are given a minimum down payment of 3 percent. A higher credit score and a lower payment above the minimum can get you easier conventional loan approval and a lower interest rate.
jumbo credit
Buying a more expensive home, typically more than about $725,000, requires qualifying for a large loan. Lenders typically look for a credit score in the 700s for these high-value loan amounts.
FHA loan
If you put down at least 10%, you can qualify for an FHA loan with a credit score of 500. With a FICO score of 580 or higher, you only need to make a 3.5% down payment.
In either case, lenders perceive home buyers with lower credit scores as higher risk, so you’ll likely pay a higher interest rate than someone with a credit score of 620 or higher.
VA loan
The Department of Veterans Affairs supports loans to military service members, veterans, and eligible surviving spouses and does not require a minimum credit score. However, the VA does not issue the loans directly; Authorized VA lenders do this, and they typically look for a credit score of 620 or better.
USDA loans
Homes and properties in rural areas and suburbs may qualify for USDA loans. Low- and moderate-income borrowers will likely need a credit score of 580 or higher to qualify for a USDA mortgage.
Read more: How to get a mortgage in 2023
How do credit scores work?
Credit bureaus gamify your debt management skills by awarding scores. The higher your score, the more reliable you are; At least that’s the algorithm’s opinion.
Credit reporting agencies like Equifax, Experian, and TransUnion track your payment history, and FICO converts that data into a score. Actually there are many points. FICO has more than a dozen scoring models for a variety of industries and purposes.
Here are the factors used to calculate the credit score needed to buy a home, according to FICO:
-
Payment history (35%): A record showing whether you made your payment on time. You’ll want to make sure this is correct.
-
Amounts owed (30%): Called “credit utilization,” it measures your total debt, such as credit card balances and auto and personal loans. Less is best.
-
Length of credit history (15%): Do you remember when you got your first credit card? FICO does this. The longer you have credit, the better.
-
New loan (10%): The number of new credit accounts you have opened recently. Opening too much can reduce your credit.
-
Credit mix (10%): The different types of credit you have, such as installment loans, credit cards, and mortgages. How these factors are incorporated into the formula is a bit of a mystery because experts say you don’t need to have every single one.
Other factors lenders will consider
While your number is important, qualifying for a mortgage is about more than your credit score.
Debt-to-income ratio: Your debt is divided by your gross (before taxes and deductions) income. This is an important factor that lenders look at. You’ll want your DTI to be in the 40% range or lower. The mid-30% range is a real sweet spot. For example, total debt (including your mortgage) = $2,000. Gross monthly income = $5,000. DTI = 40%.
Advance payment: Some loan programs allow down payments as low as 3%. The more down payment you make, the lower your monthly payment will be.
Money in the bank: Lenders want to have cash available to cover the down payment, closing costs, and some breathing room in your budget.
Work: Proof of a steady job and regular income is essential.
How to buy a house with bad credit score?
FHA’s low FICO-500 hurdle proves it’s possible to buy a home with bad credit. The question is: should you?
If your credit score is in the 500 range, taking a little extra time each month to pay all your bills on time and in full will steadily improve your score and set you up for long-term homeownership success later on.
Read more: Is 2023 a good time to buy a house?
How can you increase your credit score?
It’s simple but that doesn’t mean it’s easy. The path to a higher credit score:
-
Reduce your debt. Pay off your credit card accounts, but do not close them. This will build your existing credit.
-
Pay on time. Aim for zero late payments.
-
Fix any errors on your credit report. You can get your report for free at annualcreditreport.com.
Every month you pay your debt on time and always, you earn points. Getting a higher credit score is a long game worth winning.
