Understanding How Credit Score Impacts Your Home Loan

How do you get the home you love at a price you can afford?

It helps to understand the factors that affect your eligibility for a home loan, one of which is your credit score. Mortgage lenders use your credit score to determine if you are a responsible borrower.

So, what credit score is needed to buy a house? There isn’t a single right answer. Credit requirements vary among lenders and the various types of home loans.

While you generally need a good credit score to get the most home loan savings, you don’t need perfect credit to qualify for a home loan. Having a credit score which meets the minimum requirements is only half the battle. Your credit score will also determine what rates you are offered. A higher credit score means better rates and significant home loan savings over time. Therefore, taking steps to improve your credit score will help improve your loan eligibility and save you a lot of money.

How to access your credit score

One of the first steps you should take before you start looking for a new home is to get your credit score. This will help you determine what home loan is right for you.

Today there are a variety of ways to access your credit score. Many banks and credit cards will provide your score for free. You can also contact each major credit bureau:

What is a good credit score?

When home loan lenders assess a borrower’s creditworthiness, they generally look at what is called the FICO credit score. FICO scores range from 300 to 850.

FICO scores are classified like this:

300-579: Very poor

580-669: Fair

670-739: Good

740-799: Very good

800-850: Exceptional

Under what category does your credit score fall? How do you compare to the average American? According to Experian, 66% of Americans have a “good” FICO score or better.

What credit score is needed to buy a house?

The credit score needed to buy a house greatly depends on the type of home loan you apply for. Here are the most common types of home loans and their credit score minimums:

Conventional loans

Conventional loans are typically for borrowers with good or better credit scores. Lenders usually require you to have a credit score of 620 or higher to qualify for a conventional loan.

FHA loans

Loans insured by the Federal Housing Administration (FHA) are a good option for borrowers with lower credit scores. The minimum required credit score for an FHA loan is 500, and they require a 10% down payment. The FHA will offer loans with a down payment as low as 3.5% for those with credit scores of 580 or higher.

VA loans

VA loans are backed by the Department of Veterans Affairs and are for active military personnel and veterans of military service. It’s typical for lenders making VA loans to require a minimum credit score of 620. However, the government doesn’t have a minimum credit score to qualify for a VA loan.

USDA loans

USDA loans, supported by the U.S. Department of Agriculture, are intended for those buying homes in rural areas. It often requires borrowers to have a minimum score of 640.

Jumbo loans

Jumbo loans are for loan amounts that exceed the conforming limits set by government sponsored enterprises Fannie Mae and Freddie Mac. As of 12/1/19, these limits are $510,400 in all states except Alaska and Hawaii. Lenders typically require a credit score in the mid to upper 700s for these types of loans.

How to improve your credit score

As you can see, your credit score plays a critical role in qualifying you for a home loan and possibly saving you thousands of dollars. To increase your credit score, here are some steps you can take:

  • Pay all your accounts on time, including mortgage, credit cards, student loans and car loans.
  • Reduce and keep your balances below 30% of your available credit.
  • Check your credit report and correct any errors.
  • Don’t close any old credit accounts.
  • Do your home loan shopping within a 30-day period. This will prevent multiple lender inquiries from affecting your credit score.

Other factors that impact your home loan

It’s also important to understand that your credit score isn’t the only thing lenders take into consideration. Additional qualifications include your income, levels of debt and down payment. Ultimately, there are a lot of moving parts when it comes to finding out how much house you can afford. While there are plenty of resources available online, nothing is as accurate as the customized guidance of working directly with a mortgage professional who can assess your entire financial picture and help determine a responsible home price for you and your family.

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