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 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.
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.
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.
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.
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.