What credit score do I need to buy a house?

Posted by Linda Shaughnessy on Sunday, March 1st, 2020 at 9:22pm.

Your lender will look at scores from each of the three credit bureaus: Equifax, Experian, and TransUnion. Most lenders will then drop the highest and lowest and use the middle score in making their determination. Your credit score is affected by a number of different factors and plays different roles in different loan scenarios.

How are credit scores calculated?

Credit or FICO scores are based on a combination of the following factors:

Payment History (35%)
Amount of Credit Used (30%)
Age of Credit (15%)
Mix of Credit Types (10%)
New Credit Inquiries (10%)

Credit Scores for All Types of Mortgages

Your credit score is affected by a number of different factors and plays different roles in different loan scenarios. The minimum credit score for your mortgage loan varies according to the type of loan you’re seeking, your down payment, and the agency or organization backing the loan.

Here are some of the most popular types of mortgages along with their requirements.

Federal Housing Administration (FHA)

The FHA loan is a government-backed mortgage insured by the Federal Housing Administration and designed to assist low- and moderate- income homeowners with their home purchases. The minimum credit score for the FHA loan varies according to the down payment.

For a down payment of 3.5% of the purchase price, the minimum credit score is 580. For a 10% down payment, the minimum credit score is 500.

Veterans Affairs (VA)

The VA loan is designed to help veterans and their families buy a home with no money down. While the VA does not designate a minimum FICO score, most lenders use 620 as their minimum, with some offering VA loans with scores as low as 580.

United States Department of Agriculture (USDA)

The USDA loan is designed to help buyers who are purchasing property in a designated rural area. While the USDA does not designate a minimum score, most lenders require a credit score of at least 640.

Conventional Loans

Conventional loans come in a variety of terms with a variety of requirements. They can differ significantly depending on the down payment requirements and the loan amount. Most conventional mortgages require a FICO score of 620 to 640.

Loans for Special Circumstances

There are a variety of ways in which your home purchase and credit history may fall outside of the normal guidelines for credit approval. In these cases, your lender may require a higher credit score, larger down payment, or additional documentation for approval. These include:

Self-employed applicants
Recently unemployed applicants
Divorcing couples
Applicants with a history of foreclosure or bankruptcy

In addition, purchasing a luxury residence with a jumbo loan may subject you to more stringent requirements than purchasing a more modestly priced home. In these cases, lenders may require a FICO score of more than 700 and up to 720.

How do you raise your FICO score?

Because your credit score is based on a variety of factors, there are a number of ways to improve your score. Many of these take time, so it is important for you to start thinking about your credit score well before you are ready to apply for a home loan.

Here are seven great ways to improve your FICO score according to Experian:

1. Pay your bills on time.

It is easy to let payment due dates sneak up on you, but paying your bills on time has a big impact on your credit score. If you have a hard time keeping track, consider using automatic payments or online bill pay to pre-schedule your payments every month.

2. Get credit for on-time utility and cell phone bill payments.

Some services offer tracking for utility bills, apartment rentals, and other types of accounts in order to allow you to build a positive credit history. This can be especially helpful for building your credit when you begin working or for rebuilding your credit after a bankruptcy.

3. Pay off credit cards and keep balances low.

Carrying a large balance can create difficulties when trying to qualify for additional credit for a home purchase. Start early paying off your credit cards or, if you can’t pay them off entirely, try to keep the balances low.

4. Don’t open new credit accounts too often.

The best way to avoid overextended credit is to avoid opening up accounts in the first place. Don’t apply for retail credit cards in order to get a one-time discount. You’ll save far more money by paying cash and avoiding that extra credit account.

5. Don’t close paid-off, unused credit accounts.

You’ve paid off those credit cards. Congratulations! Be sure, however, that you leave the accounts open. That shows that you can be responsible with credit and that just because you have credit available doesn’t mean you’ll use it for a shopping spree.

6. Don’t apply for multiple accounts, resulting in numerous inquiries.

If you know that you’ll be applying for a mortgage, put off that new car or furniture purchase. Every “hard” credit inquiry causes a dip in your credit score. Just one or two of those hits in the days leading up to your mortgage approval could mean the difference between a yes or a no.

7. Check your credit report and dispute any inaccuracies.

Mistakes happen but you shouldn’t have to pay the price. If a company incorrectly reports a late payment or fails to update an error in billing, you’ll need to contact them and have your credit report corrected. In fact, check your credit report each year in order to stay ahead of any possible disputed items.

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