What credit score do you need to buy a house?
A good credit score doesn't happen by itself. You will need to exercise constant vigilance and demonstrate financial maturity over a number of years to put yourself in the best position to convince lenders you’re a low-risk candidate when it comes to larger purchases such as buying a home.
Indeed, the path to attaining a good credit score to buy a house can be a long and arduous journey where periods of financial discipline and prudent credit utilization alternate with overdue payments and closed accounts. However, aware of what’s at stake, an increasing number of Americans are taking control of their finances, and many have been adopting best practices to improve their credit scores over the last several years.
One of the greatest benefits in earning a good credit score is your enhanced ability to buy a home and obtain a mortgage at an affordable rate. Depending on your overall financial picture and the type of loan product you’re interested in, a good credit score may entitle you to the kind of attractive rates that make the dream of homeownership not just possible—but readily obtainable.
What constitutes a good credit score?
First, a little history. There are three main credit bureaus whose purpose is to collect vast amounts of financial data from your banks and creditors over the course of your lifetime. These companies—Experian, TransUnion and Equifax—compile this exacting information and release them as credit reports. Each company receives slightly different information from creditors, resulting in credit reports that are unique.
The same can be said about your credit score—the three-digit numerical expression of your credit worthiness. It will vary to some degree from one credit bureau to the next based on available information and method of calculation. And it changes over time as your financial behavior evolves.
The modern credit score goes back to the 1950’s and was created in partnership between the three credit agencies and a company called The Fair Isaac Corporation. Fair Isaac is the company behind the widely used FICO score, which is calculated using a proprietary algorithm in combination with data from your credit report. It’s typically updated on a monthly basis as new information is made available from lenders and other creditors.
While your personal credit score is a three-digit number found on scale between 300-850, it only starts to gain meaning once it’s evaluated within the context of the different credit score ranges:**
- <580 = Poor
- 580-669 = Fair
- 670-739 = Good
- 740-799 = Very good
- 800-850 = Exceptional
A good credit score to buy a home
A good credit score typically falls into the range of 670-739 using either the FICO score or the commonly employed VantageScore (created exclusively by Experian, TransUnion and Equifax). If you attain this score, you’ve demonstrated an ability to pay debts on time and maturely manage spending.
Specifically, you've demonstrated the following:
- On-time payment history
- Good credit utilization
- Multiple types of credit (credit cards + student loans/auto loans)
- New credit kept to a minimum
- Long credit history
As a consequence, you’ll likely be seen by prospective lenders as a reliable candidate to make on-time payments and therefore be approved for a mortgage.
Of course, this is just a general assessment and there are a number of mortgage loans available to homeowners, each one with its own qualifications. To better understand the minimum credit score necessary to buy a home and how your credit history factors into all this, let’s take a closer look at today’s mortgages.
Types of home loans and required credit scores
- Conventional loans
- VA loans
- FHA loans
- USDA loans
Conventional loans: min 620
A conventional home loan is precisely that—the typical home mortgage loan offered on the marketplace today. Unlike some of the other available home loans, conventional loans are not guaranteed by the federal government; however, GSE’s like Fanne Mae and Freddie Mac have established some basic guidelines for prospective homeowners to meet. Chief among them is a credit score of 620 or greater to buy a house.
If you’ve maintained good financial habits over the years and can show your lender of choice a credit score of at least 620, then this type of mortgage might be for you.
Achieving a higher credit score—something that falls into the Very Good or Exceptional range—generally enables you to make a lower down payment and get the most attractive rates. In fact, many mortgage borrowers today far exceed the minimum credit scores required to buy a house. According to one report, as of September 2020, the average credit score for individuals buying a home with a conventional loan was 759.
VA loans: min 620-640
If you currently have a credit score that resides in the Fair range, then you will likely have to choose something other than a conventional mortgage. One option is a VA loan. If you are a veteran or a qualified service member (or a spouse of one) you might want to explore securing your home purchase with a VA loan. While there is no specific minimum score required, most lenders will work with you if you can furnish a credit score in the 620-640 range. Since lenders are protected from defaults on payments, they’re more likely to accept substantially lower credit scores and offer reduced mortgage rates.
FHA loans: min 580
Federal Housing Loans, or FHA loans, offer homeowners with poor credit an opportunity to purchase a home with down payments as low as 3.5% and credit scores as low as 580. Because these are government backed, lenders can offer FHA loans knowing there is very little downside as long as homeowners meet the minimum guidelines.
USDA loans: min 620-640
For those looking to purchase a home in qualified rural areas, USDA loans can be an excellent option. LIke VA and FHA, these are government-backed loans, and as such, offer prospective homeowners very reasonable interest rates and no down payments. Most lenders who offer USDA loans will accept credit scores from borrowers in the 620-640 range.
Additional criteria includes having an income that is below 115% of the area median income and meeting certain debt-to-income ratio requirements. While not a hard and fast specification, lenders generally like to see a borrower’s total mortgage cost (principal, taxes, fees and insurance) not exceed 29% of gross monthly income.
A good credit score can affect mortgage rates
A good credit score isn’t just about loan eligibility; it’s also considered a salient factor in securing low mortgage rates. Typically, loans are structured as either 15- or 30-year loans, further delineated as fixed or adjustable rates. For fixed-rate loans, a good credit score can really make a difference in the rate that is offered. While it may not seem like a huge difference when a loan officer offers you a 2.75% vs a 3.0% mortgage rate, over the long haul—especially for 30-year loans—this distinction can add up to thousands of dollars in savings.
While the decision of what rate you’re eligible for is ultimately decided by the lender, a good credit score in combination with assets, income and down payment goes a long way in demonstrating your creditworthiness. Rates above 700 are particularly helpful, and if you score in the Exceptional range (above 800) you’ll certainly be in a strong position to ask for a mortgage rate reduction.*
It’s important to remember that different mortgages require different minimum credit scores, and finding out which ones you’re eligible for is an important first step in your journey toward homeownership.
While conducting careful due diligence and possessing a knowledgeable understanding of mortgage products are essential components in your quest to purchase a home at a good price, it should be reassuring that there is almost always a mortgage that will fit your financial situation, provided you meet the minimum guidelines. And achieving a good credit score is where it all starts.
*Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate, Inc. for current rates. Restrictions apply. **All lenders determine for themselves what constitutes a good FICO Score and how they will incorporate a FICO Score and other relevant information into the loan approval process.