You Don’t Need a High FICO Score to Buy a Home
Credit scores are crucial to the home-buying process. But it’s only one of the important pieces of the loan approval process.
Your FICO score will determine if you can qualify for a loan in the first place, but it will also have an impact on your interest rate you will pay on the house and what loan programs you can qualify for.
What credit score is needed to buy a house?
You don’t need perfect credit to get a mortgage, but if you have bad credit the banks are not going to trust you with their money.
In most cases, a minimum FICO credit score of 620 is a starting point, and 640 is the starting point for some loan types. Those with a FICO score of 740 and above will get the best available rates.
A FICO Score of 580 – 619: With these FICO scores some low down payment programs start to become available. FHA loans also allow down payments as low as 3.5%, but to qualify, you’ll need a FICO score of 580 or better. Some lenders will also authorize mortgages guaranteed by the Department of Veterans Affairs, or VA home loans, at this level
620 – 699: With these FICO scores government-backed and conventional options become available, including some down payment assistance programs.
700 – 739: People who have these FICO scores and higher qualify for better interest rates.
At this credit level, you’ll also find lenders who will consider you for higher value homes requiring “jumbo” mortgages, which people need to buy very expensive homes.
With a FICO score of 740 or higher, you’re likely to get the most favorable interest rate available, especially on a conforming (non-jumbo) conventional loan.
Conventional loans tend to require higher scores. Borrowers with higher scores also earn a break in the cost of private mortgage insurance (PMI), which is required if they make down payments of less than 20%.
How to strengthen your credit score to buy a house
If your score won’t get you the best deals on a mortgage, it might make sense to keep renting for a while and use the time to polish your credit profile. Here’s how:
- Pay all bills on time: Payment history is the biggest of all the factors that affect your credit score.
- Keep credit card balances low: Experts recommend you use no more than 30% of the limit on any credit card, and much lower is much better. How much of your available credit you are using is called your credit utilization, and it’s the second-biggest factor in your score.
- Check your credit reports: Look for score-lowering errors. If you find something, dispute it. You are entitled to at least one free credit report from each of the three credit bureaus, Experian, Equifax and TransUnion, every 12 months.
- Keep credit cards open: Closing a card reduces the amount of available credit you have, which can send your credit utilization up and ding your score.
- Look at your credit mix: If you have only credit cards or only installment loans, consider adding the other type so you can demonstrate a good payment record across diverse credit lines. If you’re trying to build up a thin credit file, you could consider a secured credit card or a credit-builder loan.
Check your credit and monitor your progress
However, if you’re near or in the excellent credit score range on a free score source, you don’t need to pay to check your FICO scores. You almost certainly have good enough credit to qualify for the best rates.
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