What Credit Score Do I Need To Buy A House?
*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
If you’ve already started the home buying process, it’s likely you know that your credit score can affect your mortgage eligibility. You may know that having a good credit score will enable home buyers to qualify for better conventional loan terms and lower interest rates, but what if you have a “bad” credit score? Will you even be eligible to qualify for a loan?
When looking to buy your first house, it’s important to understand how your credit score can affect your mortgage rates and eligibility. If you’re worried that your score may be too low to qualify for a mortgage or if you’re unsure what the minimum credit score needed to buy a house is, don’t fear. Learning more about the importance of your mortgage credit score will give you the boost you need to help build your credit before purchasing your first house.
What Is Your Credit Score And Why Does It Matter?
A home buyer’s credit score is a three-digit number that represents your credit history and therefore determines how likely you are to repay debt. Mortgage lenders use this score to decide if they will approve your loan. If they do, your score will be used to set loan terms. Loan terms can include how much money your lender will give you, how long you have to pay them back and what mortgage rates you will be offered.
How Does Your Credit Score Affect Your Interest Rate?
When qualifying for a mortgage, the lower your interest rate, the better. Interest rates are determined based on the credit risk you pose. Low interest rates are given to people who are low-risk, which means they are more likely to pay back the money that is being lent to them. These mortgage rates are desirable because there is less interest added to the monthly payment, making it easier to pay. On the other hand, home buyers who present a higher credit risk have higher interest rates tacked onto their loan, making each monthly payment that much larger.
Therefore, having a good credit score will make you eligible for a lower interest rate and will in turn save you thousands of dollars in interest.
What Does Your Credit Score Have To Be For Buying A Home?
Now, you might be wondering what credit score you need for buying a house. Unfortunately, there is no exact number that home buyers must aim for. That’s because in addition to your credit score, many other factors go into qualifying for a mortgage; for example, your income and debt levels, as well as what type of home loan you’re applying for – whether it’s a conventional loan with a fixed rate or one with an adjustable rate. Though there is no exact number that determines whether you will qualify for a loan, here are the standard minimum credit scores that our sister company Quicken Loans® uses when making home loans:
- Conventional loans: 620
- FHA loan: 580
- VA loan: While the Department of Veterans Affairs does not have a minimum credit score requirement, Quicken Loans requires a 620 credit score on all VA loans.
- USDA mortgage: 640
Those are the minimum credit scores needed to buy a house. A higher credit score will generally give you the advantage of having better loan terms and a lower interest rate, which will save you money.
Are There Mortgage Options For People With Bad Credit?
If those numbers are unsettling to you, it’s important to note that credit is just one factor that determines your mortgage eligibility. As previously mentioned, loan type, income and debt levels are also factors that can help you qualify for a mortgage.
Should You Get A Mortgage With A Cosigner?
Perhaps you’ve realized that you may have difficulty qualifying for a mortgage due to poor credit, but maybe your spouse or roommate has better credit. If that’s the case, you may consider getting a mortgage cosigner to help you qualify for a loan.
A mortgage cosigner is someone who is added to the mortgage application, along with the primary borrower. However it’s important to note that they don’t get rights to the property; instead, their role is to make the application look more appealing so home buyers with less-than-stellar credit can hopefully qualify for better loan rates.
When evaluating an application with a cosigner, the mortgage lender will choose the lowest median credit score of the borrower and the cosigner. For example, if your cosigner’s scores are 700, 720 and 740, and your scores are 540, 590 and 600, the qualifying credit score would be 590.
If you’ve worked hard to maintain a high credit score, you should sign the mortgage alone. But it’s worth considering a cosigner if that can help you get a better rate.
Finding Your Credit Score
Knowing the minimum credit score you need is probably leading you to wonder what yours is. Credit scores can be complex, because there is not just one type. The two main kinds are called FICO®Score and VantageScore®, but even between them there can be different models with slight variations in how they prioritize the information on your credit report.
There are many tech-savvy tools that can help you build and track your credit score, such as Rocket HQSM, which allows you to monitor your credit by giving you free access to your VantageScore 3.0® credit score and a report from TransUnion® every week. This score will give you detailed information about your credit reports and even include advice on how you can improve your credit score.
Another confusing aspect is that you might hear people unwittingly use the terms “credit report” and “credit score” interchangeably, but they are different. Your credit score, as mentioned, is a three-digit number. Your credit report, however, is the total of all your financial information from which your credit score is derived. Note that your credit report won’t always have a credit score on it.
Wondering how your credit score is determined? Here are the general data pieces and their relative importance used to develop your FICO® Score:
- Payment history (35%): This is how regularly you make on-time payments, and as you can see, is the top component of your credit score.
- Amounts owed (30%): Also called credit utilization, this refers to how much of your available credit you are using. Lenders like to see that you are using your existing credit wisely, rather than running up big balances.
- Length of credit history (15%): This means how long you have had credit to be tracked, dating back to when you opened your first credit card.
- New credit (10%): This means how recently you have opened new loans. A lender might be wary if you are opening lots of accounts, since that could make it hard for you to pay your bills.
- Credit mix (10%): This means the types of credit that you have, such as credit cards, car loans, student loans, etc.
Improving Your Credit Score
Even though you’re in the early steps of home buying, you still have time to build your credit score. As you can see, building and maintaining your credit score is important because it can help you qualify for a wider variety of loan options and help you save thousands of dollars.
Here are some ways you can start to improve your credit score today:
- Checking your credit reports to make sure that your credit history is accurate. Often they contain mistakes that can lower your score through no fault of your own,
- Always paying your bills on time since that consumes the largest percentage of your credit score makeup.
- Reducing credit card balances to keep your credit utilization low.
- Refraining from opening additional credit card accounts.
- Keeping older credit cards open, even if you rarely use them, to bolster your credit history. Wondering how to get a credit card with no credit? Some options to consider are store credit cards, secured credit cards and student credit cards.
Now that you know what credit score you need to buy a house, you can continue to build your credit so that when you apply for a mortgage, you are more likely to qualify for a loan and then subsequently receive better loan terms and a lower interest rate.
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