When it comes to buying a home, your credit score is a key factor. Generally, a credit score in the high 600s to 700s is considered strong and will likely help you secure a favorable mortgage rate. Scores above this range are often seen as “exceptional,” offering you the best possible interest rates.

While it’s possible to buy a home with a range of credit scores, having a higher score can improve your chances of securing better loan terms. If you’re purchasing a home outright with cash, your credit score won’t be a concern since you won’t need financing.

Why Does Your Credit Score Matter in Home Buying?

Your credit score is crucial when it comes to qualifying for a mortgage. Not only does it affect your eligibility, but a higher score can also lower your interest rate. Even a small difference in your rate, such as 0.25% or 0.5%, can save you thousands of dollars over the life of your loan.

Lenders place significant weight on your credit report because it reflects how you’ve managed your finances over time. A strong credit score indicates you’re a responsible borrower, while a lower score may suggest past financial challenges, making lenders view you as a higher risk for mortgage payments.

Understanding the Role of Credit in Home Buying

When applying for a mortgage, lenders don’t just look at your credit score—they also analyze your entire credit report to get a full picture of your financial history and current situation. Your credit score is derived from this report, which includes details like your payment history, the types and number of open accounts you have, whether any of your debts have gone to collections, and if you’ve ever filed for bankruptcy.

The Importance of Mortgage FICO Scores

In the mortgage approval process, lenders primarily rely on your FICO score, a credit scoring model specifically designed for home loans. This score is calculated using a unique formula that draws on data from the three major credit bureaus: Experian, Equifax, and TransUnion.

FICO scores range from 300 to 850, with most consumers falling between 600 and 750, according to Experian.

Key Factors That Influence Your Mortgage FICO Score

Your FICO score is influenced by several factors, each contributing differently to the overall score:

• Payment history (35%): Timely payments on all your credit accounts.
• Credit utilization (30%): The percentage of your available credit that you’re currently using.
• Length of credit history (15%): How long you’ve maintained an active credit profile.
• Credit mix (10%): The variety of credit types you have (e.g., credit cards, loans).
• Recent credit activity (10%): New credit accounts or recent inquiries.

Buying a Home with a Co-Borrower

If you’re purchasing a home with a partner, lenders will evaluate both of your credit scores to determine what’s called a “decision score.” This is the lower middle score between the two borrowers.

For example, if your three credit bureau scores are 720, 740, and 760, and your co-borrower’s scores are 640, 660, and 680, the decision score will be 660, the lower of the two middle scores. Lenders use this score to decide whether to approve the loan and on what terms.

One advantage of buying a home together is that a higher combined income can qualify you for a larger loan. However, if one partner has a lower credit score, you might consider applying for the mortgage under the name of the person with the stronger credit score. Keep in mind that omitting one person’s credit score from the application also means omitting their income.

What’s a Good Credit Score for Home Buying?

A credit score of 720 or higher is generally considered good for buying a home. Scores of 800 or above are ideal, as they unlock the best loan rates and terms. However, even with a score around 670, you can still qualify for competitive rates.

Understanding Mortgage Credit Score Ranges

If you’re just starting to explore mortgage options, you might not have accessed your official mortgage credit report yet, which includes your FICO score. Lenders are required to use FICO scores to meet loan qualifications for programs like Fannie Mae, Freddie Mac, VA, FHA, and USDA.

You can also check your credit score through various online sources. While these typically provide your Vantage score rather than your FICO score, both score types range from 350 to 850. Keep in mind, however, that Vantage scores might differ slightly because they evaluate your credit information differently. For example, a Vantage score of 660 is generally considered good.

Getting a Handle on Your Credit Score: A Key Step in Home Buying

Your Vantage score can serve as a useful initial indicator of your overall credit health and provides a reasonable approximation of your FICO score. If you’re receiving a lot of promotional offers for credit cards or credit lines, it could be another sign that your credit is in good shape.

What’s the Minimum Credit Score Needed to Buy a Home?

The lowest credit score generally accepted for securing a mortgage is a FICO score of 500, but this usually comes with the requirement of a larger down payment and higher interest rates. For an FHA loan, which is a popular choice for first-time buyers, a score of at least 580 is typically required.

The specific credit score you need can vary depending on the type of loan you’re applying for and other factors like your down payment, income, and debt levels. Here’s a breakdown of the minimum credit scores required for various types of loans:

• Conventional Loans: Minimum credit score of 620 to 660. These loans are common, especially among repeat buyers with larger down payments. They often come with lower interest rates and the option to avoid private mortgage insurance with a 20% down payment. However, qualifying can be more stringent since private lenders back these loans.

• FHA Loans: Minimum credit score of 500 to 580. FHA loans are government-backed, making them more accessible to first-time buyers. A score of 580 or higher qualifies you for a down payment as low as 3.5%. With scores between 500 and 580, a 10% down payment is required. Keep in mind that FHA loans come with a lifetime mortgage insurance premium.

• VA Loans: Minimum credit score of 580 to 620. Available to military service members and veterans, VA loans offer competitive rates and the potential to buy with no down payment. Unlike FHA loans, VA loans don’t require mortgage insurance, but an upfront funding fee is applicable.

• USDA Loans: Minimum credit score of 580 to 620. USDA loans are designed for low-income buyers in rural areas and offer flexible qualification terms. No down payment or mortgage insurance is required, but an upfront funding fee applies.

• Jumbo Loans: Minimum credit score of 680 to 700. Jumbo loans are used in high-cost housing markets where the loan amount exceeds conventional limits. These loans often require a 20% down payment and come with interest rates similar to conventional loans, but the qualification standards are stricter due to the higher loan amounts.

Other Key Factors in Mortgage Qualification

While your credit score is crucial, lenders also consider several other factors when deciding whether to approve your mortgage:

• Income and Assets: Your lender will review your income and assets to ensure you can comfortably manage your mortgage payments. This typically involves submitting documents like W-2s, pay stubs, tax returns, bank statements, and, if applicable, a signed purchase and sale agreement.

• Employment History: Proof of steady employment is important, especially as you get closer to buying a home. Lenders will typically verify your employment during the pre-approval process and again before closing.

• Debts: Lenders assess your current debts to determine whether you can afford additional mortgage payments. They’ll examine your credit report for any outstanding debts, such as credit card balances, car loans, student loans, and any other financial obligations.

• Debt-to-Income Ratio (DTI): Your DTI ratio is a key metric that compares your monthly debt payments to your gross monthly income. A DTI of 40% means that 40% of your income goes toward repaying debts. A healthy DTI is generally under 50%, including your prospective mortgage payment, although some loan programs may allow for higher percentages.

The maximum DTI allowed depends on the loan type and individual lender criteria, which consider your overall financial picture, including income, debts, down payment size, and credit score.

Understanding Loan-to-Value Ratio in Home Buying

As you move forward with your home purchase, your lender will calculate your loan-to-value (LTV) ratio once you’re under contract. This ratio compares the amount you’re borrowing against the appraised value of the property. LTV is a key factor in determining whether you’ll need to pay for mortgage insurance. It’s expressed as a percentage, with a lower percentage being more favorable. A larger down payment can reduce your LTV, as it means you’re borrowing less.

To calculate your LTV, divide the loan amount by the home’s appraised value, then multiply by 100 to get a percentage.

For example, a first-time buyer might have an LTV of 96.5% with an FHA loan, or even 100% LTV with a VA loan. Conventional loans often have an LTV around 97%, but reducing your LTV to 80% or lower can help you avoid mortgage insurance.

Preparing Your Credit Score for Home Buying

Before you start the home buying process, it’s important to review your credit report and check your Vantage score. You can request free annual credit reports from Equifax, Experian, and TransUnion through AnnualCreditReport.com. Errors on credit reports are common, and even small mistakes can negatively impact your score. It’s wise to check your reports early and frequently, and to request corrections if you find any inaccuracies.

If you’re new to building credit, you might not have a credit score yet. It usually takes three to six months of credit activity to generate a score. A good starting point is to open a single credit account and make consistent, on-time payments for several months. Additionally, some services can report your rent and utility payments to the credit bureaus, helping to establish your credit history.

Tips to Improve Your Credit Score

If your credit score isn’t where you want it to be, there are several strategies you can use to boost it before buying a home:

• Pay off any delinquencies: If you have late payments, try to pay them off as soon as possible. If full payment isn’t an option, consider consolidating your debt into a new account with a lower promotional rate.

• Set up automatic payments: To avoid missing payments, use automatic payment tools to ensure your bills are paid on time.

• Reduce your credit utilization: Lower your credit usage by spending less on your credit cards or requesting a credit line increase.

• Keep old accounts open: Even if you don’t use them often, keeping credit accounts open can benefit your score, as the length of your credit history is a contributing factor.

• Minimize hard credit inquiries: While you can shop around for mortgage rates within a 45-day window without multiple inquiries affecting your score, it’s best to avoid other hard credit inquiries, such as applying for new credit cards, in the months leading up to your mortgage application.

Buying a Home with Poor Credit

If your credit score is low, homeownership might still be within reach. Start by getting pre-qualified to estimate how much you might be able to afford with your current credit profile. Be open with your lender about any past financial challenges so they can work with you to find a suitable financing option. An FHA loan, for example, could be a good choice as it allows for credit scores as low as 580, or 500 with a larger down payment.

Frequently Asked Questions About Home-Buying Credit Scores

• Can you buy a house without a credit score?

If you’re paying in cash, you can purchase a home without a credit score. However, if you’re seeking financing, having a credit score is essential.

• Do you need good credit to buy a house?

While it’s possible to buy a house without excellent credit, it will likely cost you more over time in the form of higher interest rates, larger monthly payments, and potentially additional upfront costs to reduce your interest rate.

• What should your credit score be to buy a house?

Ideally, aim for a credit score between 720 and 760 to secure the best terms on a conventional loan. For FHA, USDA, or VA loans, a score around 670 can still result in favorable loan terms.