Learn how credit helps you take out a mortgage, how your score affects your interest rate, and how to increase your score before you buy.
- While there are basic guidelines, specific minimum scores vary by lender
- Credit score isn’t everything
- There are some key things to do before applying for a mortgage that will boost your score
- It may still be possible to buy a home even if you have a lower-than-average credit score
How important is your credit score when applying for a mortgage?
While a credit score is important, it’s not the only thing lenders look at before they approve you for a home loan. Lenders use a holistic approach to vetting mortgage applicants with several financial factors.
Here’s what mortgage lenders consider when deciding to approve loans:
- Employment history
- Down payment amount
- Tax information
- Banking activity
- Debt-to-income ratio
- Negative marks on credit
While a good credit score can increase your chance of being approved, it won’t always outweigh other factors that lead to you being denied a loan. Lenders need to see that your financial present and past both prove that you’re a borrower who is capable of making full, on-time payments each month for the duration of a home loan. Even a person with a perfect credit score won’t necessarily be approved if they’ve only been in a full-time job for a few months when applying for a mortgage.
The higher score, the better
The lower your credit score, the higher your interest rates. Generally speaking, lenders will raise your interest rate by 0.2% for every 20 points below their ideal credit score—usually around 780. Just doing the work to hit the minimum credit score for your lender means you could still end up paying tens of thousands to hundreds of thousands of dollars more over the life of your home loan.
If your score is the minimum for approval, consider doing a credit score boot camp for a while to try to improve your credit score by as many points as possible.
How to improve your credit score
The period between when you decide you want to buy a home and when you get pre-approved provides an opportunity to add as many points to your credit score as possible. Each credit bureau uses their own formula to calculate credit scores, but you can use the FICO score as a guide. Scores are weighted using payment history (35%), current credit usage (30%), the length of your credit history (15%), the types of credit you have (10%), and recently opened credit lines (10%).
Boosting these categories doesn’t have to be painful if you make some strategic choices. Here’s how to manage your credit score to make sure you get the best rate possible on a mortgage:
- Don’t take out any new lines of credit for three to six months before you apply for a mortgage
Most credit applications require hard pulls of your credit history that reduce your score.
- Pay your bill on time
Use apps, automatic payments, or calendar alerts to keep you current with all bills. Don’t let forgetfulness cost you thousands in interest when you apply for a mortgage.
- Pay down debt as quickly as possible
Credit card balances can harm your debt-to-income ratio (DTI).
- Don’t close any accounts
If you have old credit cards or bank accounts that you’ve had since you made your first paycheck from your high school job, this isn’t the time to close them out. Long-standing accounts actually boost your credit history while also propping up your credit-utilization ratio. Those accounts are passively boosting your score.
- Cut spending as much as possible and pad your bank account for a better DTI
Living below your means by as much as possible for six months to boost your credit score makes a big difference in what you’ll pay for a mortgage. Plus, it’ll help increase your available cash for a down payment.
A negative item on your credit report won’t necessarily block you from getting approved for a home loan. But it could make the process much bumpier. Lenders are likely to ask for written explanations for any red marks in your credit history. That added step could potentially cause you to miss out on a home in a rushed market.
What credit score do I need to buy a home?
The type of loan you use to finance your home will affect your budget for thirty years or more. Take a look at the minimum credit scores required to qualify for loan options that can finance the purchase of your new home.
Conventional Mortgage: Minimum Credit Score of 620
Conventional loans are considered best for people with good to excellent credit. While they require higher credit scores than other options, they often provide the best interest rates with flexible repayment periods lasting from eight to 30 years. The reason why lenders are stricter with conventional loans is that they aren’t insured by government agencies. Typically, a down payment of 20% is required with a conventional loan.
FHA Loan: Minimum Credit Score of 580
Lenders consider FHA loans less risky because they are insured by the Federal Housing Administration (FHA). As a result, FHA loans are easier to qualify for compared to conventional loans. It’s also possible to put down as little as 3.5% for a down payment with an FHA loan. If you’re able to put down 10%, the minimum credit score requirement for an FHA loan may not apply.
VA Loan: Minimum Credit Score of 580 to 620
VA loans are loans that are insured by the U.S. Department of Veterans Affairs. No down payment is required. Borrowers don’t pay for private mortgage insurance (PMI) with a VA loan. However, there is a one-time funding fee that’s determined by factors like down payment amount, loan type, and the form of military service logged.
Buying a home with a low credit score
FHA loans are designed for borrowers with lower credit scores. However, some would-be buyers need more help with patching up credit issues before they can qualify for FHA loans. Yes, being approved for a mortgage with bad credit can be difficult. Being approved for a home mortgage with a good interest rate with bad credit is even harder. However, it’s not impossible. The first priority is to use those boot camp tips to try to boost your credit score by as much as possible in the months leading up to your application.
Here are other strategies to buy a home with low credit:
Focus on a bigger down payment
A larger down payment can ease your lender’s hesitation. Showing up with a bigger down payment is the surest way to increase your chances of being approved. Do your best to go on a savings spree to get to 20%.
Shop around for lenders
Each lender will have their own individual policies regarding minimum credit scores. While lenders generally follow the same basic guidelines, it’s actually possible for one lender to be more lenient than others for credit scores. Get a second opinion if you’re rejected by your first lender.
Use a co-Signer
It’s becoming increasingly common for first-time buyers to snag homes with help from co-signers. A co-signer is a person who agrees to take on joint responsibility for your mortgage. Typically, a co-signer is a parent or close relative. It’s not necessary for a co-signer to live in the home with you. However, a co-signer does share ownership and repayment responsibilities.
The simple rule is that higher is better when it comes to credit scores. While it can be tempting to focus on just eking by with the minimum score, first-time buyers should also consider the importance of boosting credit scores to get better interest rates with favorable borrowing terms for better long-term financial benefits.
What credit score do lenders look at?
Lenders usually use the FICO score when vetting borrower applications. The general guidelines say that you’ll need a score of 620 for a conventional loan, 580 for an FHA loan and 580 for a VA loan.
How can I fix my credit quickly to buy a house?
Don’t make any drastic changes to your lifestyle in the months leading up to applying for a mortgage. Buyers should focus on building up credit history by paying down debts while avoiding taking out any new lines of credit. This will boost the all-important debt-to-income ratio that lenders look at when determining your risk level as a borrower. It’s also important to avoid closing any credit cards or financial accounts because older sources of credit boost your score.
What can I get with a 700 credit score?
A credit score of 700 will qualify most borrowers for a conventional loan as long as the borrower satisfies all other lender requirements.
Can I buy a house if I have debts in collections?
While the process may be more difficult, it’s technically possible to qualify for a mortgage if you have debts in collections. Some traditional lenders automatically disqualify borrowers with collections on credit reports. However, some lenders may be willing to work with you if you can provide proof of payments or payment plans. Unfortunately, student debt in collections can block your plans for buying a home. Tax liens and judgments must also be satisfied before lenders will approve closings.
About the author: As the son of a construction contractor and a former property manager, Scott knows how to keep the lights on and the water running. In addition to Flyhomes, he has written for Angi, HomeLight and HomeAdvisor. His hobbies include fixing things around the house, baking things up in the kitchen, and spending quality time with his wife and daughter just about everywhere.