Buying a house is such an exciting time, but it can be overwhelming too. Will you get approved for a mortgage? It often feels like a mystery, right? What do lenders want? Lenders look at many factors, but the first and probably the most important is your credit score. So what credit score is needed to buy a house?

We’ll answer this question and more below so you can approach your mortgage application with confidence.

What is a Credit Score?

Before we get too far into the topic, let’s look at what a credit score is and how it works since it’s often a misunderstood topic. Credit bureaus calculate your credit score based on information they receive from your creditors. Most creditors (not all) report the latest information about your tradeline every 30 days.

Some of the information they report includes:

  • Payments – Did you make your payment on time, or did you miss a payment by more than 30 days?
  • Balance – This is the amount of your current balance after your latest payment.
  • Payment required – This is the monthly payment you must pay each month.
  • Total credit line – If you have revolving accounts (credit cards), this is the total credit line available to you.

Each month, the credit bureaus use this information to come up with your credit score. Each of the three bureaus – TransUnion, Experian, and Equifax, weigh each factor differently and come up with your credit score.

What Credit Score is Needed to Buy a House Right Now?

Most loan officers first pull your credit score to see if you qualify for any loan programs. If your credit score is way off from what the programs require, they know not to move forward. If it’s within the parameters of several programs, they’ll help you decide which would be the most beneficial for you. So what credit score is needed to buy a house right now? It depends on the loan program.

Conventional Loan Minimum Credit Score Requirements

Conventional loans are the typical loans most people talk about. They are also the hardest to qualify for, but they don’t have super high credit score requirements. Every lender has different requirements, but on average, you’ll need at least a 620-credit score. A higher credit score will make it easier to qualify and get the best terms, but a 620 may still get you into a loan.

FHA Loan Minimum Credit Score Requirements

FHA loans have a much lower credit score requirement and are often the alternative when borrowers don’t qualify for a conventional loan. Most lenders allow a 580-credit score for FHA loans, but some like a slightly higher score or other compensating factors like a low debt to income ratio or large down payment.

VA Loan Minimum Credit Score Requirements

VA loans are for veterans that served our country. It’s a way of saying ‘thank you’ by helping you buy a home with relaxed guidelines. The VA doesn’t have a specific credit score they require, which is the nice thing about VA loans. Most lenders, though, want at least a 620-credit score. This shows lenders you can afford the payment and are likely to pay the loan back.

USDA Loan Minimum Credit Score Requirements

USDA loans are another government-backed loan but they are only for low to moderate-income families buying a home in a rural area. The program is for families that don’t own a home and don’t qualify for any other loan program. You’ll need at least a 640-credit score to qualify.

Jumbo Loan Minimum Credit Score Requirements

Jumbo loans are loans beyond conventional loan limits. In 2022, the limits are $647,200. If you need to borrow more than that (and qualify), you’ll need a great credit score. Most lenders want at least a 700-credit score, but some even want a higher score because of the risk involved.

Why Lenders Care about What Credit Score is Needed to Buy a House

You might wonder why lenders care about what credit score is needed to buy a house. If you have enough income and you meet the down payment requirements, what’s the big deal? There are many reasons they care. Here’s why.

You’re Likely a Lower Risk

If you have good credit, chances are you handle your financial responsibilities well. You don’t miss payments and you haven’t defaulted on any loans recently.

This shows mortgage lenders you are a good risk. You most likely won’t default on your loan and they can trust you.

You Might Have a Low Debt to Income Ratio

If you have too much outstanding debt, your credit score will drop. Your credit utilization rate is the second largest part of your credit score. If you have over 30% of your credit line outstanding, it hurts your credit score.

If you have a great credit score, chances are you don’t have a lot of outstanding debt. This means you’ll have enough money free to pay the mortgage you applied for. The less outstanding debt you have, the easier it is to get approved.

You Probably Have Steady Income

If you have good credit, chances are you have a steady income. Without a steady income you can’t keep up with your bills which hurts your credit. Showing a stable credit history lets lenders know you do what it takes to make ends meet no matter what.

Can you Get a Mortgage with Bad Credit?

As we explore what credit score is needed to buy a house, you probably have one thought in your mind. Can I get a mortgage with bad credit? Everything we’ve said so far indicates that you need great credit, and you do. But yes, there are ways to get a mortgage with bad credit. The easiest way, however, is to improve your credit score. Like we said earlier, creditors report to the credit bureaus monthly. You have 12 opportunities a year to increase your credit score. Here’s how.

Simple Ways to Increase your Credit Score

  • Bring all payments current
  • Lower your outstanding debt
  • Don’t open new credit accounts
  • Don’t close old credit accounts
  • Make sure all information on your credit report is accurate

Your credit score won’t change overnight, but with some or all of these steps and consistency, you’ll see your credit score improve.

Securing a Mortgage with Bad Credit – Compensating Factors

What if you need a mortgage right now and don’t have time to improve your score? There is a workaround, but it requires some effort.

You must be able to prove that you have ‘compensating factors’ for your bad credit. In other words, you have ‘good factors’ that make up for the bad. Every lender accepts different compensating factors, but here are some examples.

Large Down Payment

Every loan program has a different down payment requirement, but it’s just a minimum. You are always free to invest more money in the home than is required. If you do, it lowers the risk of default. Investing more upfront means you borrow less money and have a lower mortgage payment.

Low Debt-to-Income Ratio

Your debt-to-income ratio is a comparison of your total monthly debt to your gross monthly income (income before taxes). The more debt you have, the higher your risk of default becomes.

Each loan program has a specific debt-to-income ratio MAXIMUM. This doesn’t mean you should meet that amount. If your DTI is much lower than the maximum DTI allowed, you pose a much lower risk of default.

Stable Income and Employment

All lenders want to see at least a 2-year stable employment and income history, but if you have an exceptional history, it can help you qualify even easier. Knowing you are stable at your job and that your income regularly increases shows that you are a good risk, and it may make up for a lower than desired credit score.

The Bottom Line

Knowing what credit score is needed to buy a house is a big piece of the puzzle. A mortgage is a big commitment, but when you have good qualifying factors, you’ll get the most favorable rates and terms. No one needs perfect credit, but good credit is always desired. The higher your credit score is, the lower the risk of default you are, which is important. Since your credit score is just one piece of the puzzle, it’s important to focus on other factors too. Presenting as many ‘good factors’ as possible will increase your chances of approval. If you don’t have the necessary credit score to get a mortgage, though, there are ways to increase it. If you’re ready to see if your credit score qualifies you for a mortgage, contact us today! Our professionals are happy to walk you through the process and see what loan programs you qualify for with your current credit score.

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