What Credit Score Is Needed To Buy A House?

You don’t need perfect credit to buy a home, but having good credit helps reduce the interest rate you’ll pay and increases the changes you will be approved for the loan.

For the best mortgages available — with low interest rates and flexible terms — you’ll need scores around 760 or higher, but you can still qualify for most loans with scores of 620 or higher.

If your credit scores are lower than that, you may need to get creative. Your best option could be a special loan program backed by the federal government, your state, city, or county.

Why Do Mortgage Lenders Use Credit Scores?

When a lender gives you a mortgage, they take a big risk. If you don’t pay back the loan, the lender loses money, and they may have to go through an expensive foreclosure process. One way the lender reduces their risk is by reviewing your credit scores.

Your credit score is a number that reflects how well you’ve managed debt in the past, and it shows lenders how statistically likely you are to pay back new debt. If you’ve paid off your debts as agreed over the last seven years, and your credit card balances are low, you’re likely to have high FICO scores and be approved for better loans.

Credit Score Requirements by Home Loan Type

If your credit scores aren’t great, you might want to look at a few different loan types to find one that’s flexible enough to approve applicants in your situation. Here are some options to consider:

Conventional Loan

Conventional loans are the most common type of mortgages available. They differ from other mortgage types in that they’re not backed by government agencies, like Freddie Mac or Fannie Mae.

Conventional loan credit score requirements will vary from one lender to the next, but most require scores of 620 or higher.

VA Loan

The U.S. Department of Veterans Affairs (VA) guarantees home loans for veterans and servicemembers. You can apply for one of these loans through a financial institution, such as your bank or credit union.

There is no set down payment or minimum credit score requirement to qualify for a VA loan, but each lender has their own requirements. As with conventional loans, you may need scores of 620 or higher.

FHA Loan

The Federal Housing Administration (FHA) backs mortgages that are available through HUD-approved lenders. These FHA loans require down payments as small as 3.5% of the purchase price, and you can be eligible for the maximum financing with scores as low as 580, but you need scores of 500 or higher to be approved.

USDA Loan

The U.S. Department of Agriculture (USDA) has several loan programs meant to help income-eligible people “buy, build, or repair affordable homes located in rural America.” They include:

• Single Family Housing Direct Home Loans, available directly from Rural Development.
• Single Family Housing Guaranteed Loan Program, available through an approved lender.

These programs don’t require a down payment and have no set minimum credit score, but the lender will likely have a minimum credit requirement. You could potentially be approved, however, based on non-traditional forms of credit, such as your car payment history or your rent payment:

Just note that the USDA will not accept credit scores impacted by Experian Boost.

Jumbo Loan

Most home loans over $726,200 are considered “jumbo” loans. These mortgages, which are usually used to buy luxury homes, are available through banks and credit unions, and may require credit scores of 700 or higher depending on the lender.

How Credit Scores Affect Mortgage Rates

Your credit scores have a direct impact on your mortgage rates, and as a result, how expensive it is to borrow money to buy a home.

In  2023, FICO reported these average interest rates for a $300,000 mortgage, for each credit score range:

As you can see, having low credit scores means higher APR and higher monthly payments on a mortgage. But it’s easy to underestimate just how expensive borrowing really is for someone with bad credit.

For a $300,000 loan with 8.66% APR, when paid back over 30 years, you’ll pay a massive $545,983 in interest charges. By comparison, at 7.099% APR your interest charges drop to $426,512. That’s still costly, but it’s a difference of $119,471.

In short, improving your credit before applying for a mortgage can save you more money than any other financial move you make in your lifetime.

Other Factors That Mortgage Lenders Consider

Credit isn’t the only consideration that comes into play when you apply for a mortgage. Each lender has different policies, but most have similar requirements for income and debt when it comes to conventional loans, including:

• Debt-to-income (DTI) ratio: You might not be approved for a mortgage if your minimum monthly debt payments, including the mortgage, account for more than 36% of your monthly gross income.
• Loan-to-value (LTV) ratio: For many mortgages, the maximum amount you can borrow is 80% of the value of the home (which means you need a 20% down payment).
• Employment history: You may need to show the lender proof of two years of consistent employment history.

Steps To Improve Your Credit Score

Homebuyers can save tons of money — and improve their chances of being approved for loans — by working on their credit before applying for mortgages. Here are some strategies for increasing your credit scores:

1. Correct Any Errors

You can pull free copies of your three credit reports once a year. By reviewing them far in advance of applying for a loan, you give yourself time to catch errors, dispute them, and find other areas for improvement.

2. Make Debt Payments on Time

More than any other activity, paying debt on time can help your credit scores grow. That includes making at least the minimum payment due on credit card payments and loans each month. By contrast, missing just one payment can cause your scores to drop by a hundred points or more.

3. Improve Your Credit Utilization

When your credit card balances rise, your credit scores fall, so you can improve your scores by reducing your credit debt. Plus, paying off your credit card each month helps you avoid interest charges.

For added benefit, consider asking your creditor to increase your credit card limit once a year. Just be sure to keep your balance low as your limit increases.

4. Don’t Close Old Credit Accounts

Closing credit card accounts can hurt your credit scores, since it reduces your available credit, and it can reduce your average length of account history.

Avoid closing old accounts unless they’re causing financial issues, or you don’t want to pay the annual fee. But, if possible, hold off until you’ve closed on your mortgage.

5. Don’t Open New Lines of Credit

Your credit scores drop anywhere from one to five points when you apply for a new loan, a credit card or line of credit. Once you open a new account, your scores can drop even more if you have new debt, or you reduce your average length of account history.  So, if you’re preparing to apply for a mortgage, wait to take out other loans or open new credit cards.

More Home Buying Tips

Having a mortgage will likely be the biggest financial responsibility of your life. Most mortgages take three decades to pay off and cost six figures in interest charges. In other words, getting a mortgage shouldn’t be a rushed decision.

Yes, you can get a mortgage with bad credit, but you might not really be able to afford the loan. Instead of trying to make it happen fast, invest some time and preparation. Check out the first time homebuyer programs available in your state, city and county, and take action to improve your credit scores. The extra work could have a massive payoff, and help you find a loan that works for you for the long term.