A good credit score is an excellent asset when you are in the market for a new home. It's one of the first things a lender or mortgage broker will look at and will play a big part in determining what loan amount and interest rate you qualify for.
Does this mean you need a 700 or higher FICO before you buy a home?
Not necessarily, but for the most part, the higher your credit score, the better loan you will be able to secure.
What defines a good or bad credit score?
All three major credit reporting agencies grade your credit history from 350-850. The ranges for what's good and bad are as follows:
- Bad Credit: 500-579
- Poor Credit: 580-619
- Fair Credit: 620-679
- Average Credit: 680-739
- Great Credit: 740 and above
What do lenders care about?
A lender's primary concern is whether or not you are going to be able to pay the loan back and make your monthly payments on time.
What lenders don't care about is keeping your loan. They want to get the best loans so they can sell them to larger financial institutions. To a lender, your mortgage is a product to sell and they want to have the best product possible.
Is there a minimum credit score needed for a loan?
The short answer is yes.
The exact score really depends on the type of loan as well as the lender. Here are the typical required FICO scores by type of mortgage:
- Conventional Loan: 620+
- FHA Loan: 580+
- VA Loan: Generally 620+ although possible to get approved on lower score.
- USDA Loan: 640+
These are the minimums to get approved, but Fannie Mae or Freddie Mac may require the score to be higher in order to insure it. A lender can still approve you, but since they view your mortgage as a product they are going to sell, they aren't likely to.
What else does my credit score mean?
Besides enabling you to get approved for a loan, the better your score, the better the terms of the loan will be.
A better score may not require a very high down payment. A high score will also mean a lower interest rate as it is clear that you have proven the ability to make payments on time.
How is my credit score determined?
Your FICO score is determined by several different categories, but they do not all carry equal weight. Here's how it breaks down:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- Credit Mix: 10%
- New Credit: 10%
Payment history is the most important factor in determining your credit score and this makes sense considering this is what lenders truly care about. Do you have a good history of paying your debts off on time?
What do lenders look at besides my credit score?
- Debt-to-income ratio: This is a percentage of the amount of your pre-tax income that goes towards paying off debts each month. You can have an excellent credit score but a high debt-to-income ratio can severely impact your ability to get approved for a loan.
- Current Income: Do you make enough money each month to be able to comfortably make mortgage payments?
- Employment History: Do you have a good job that it seems like you will be able to keep for a long time? Or have you bounced around a lot and appear to be unreliable from an employer's perspective?
- Loan-to-value ratio: This is the ratio of loan amount to value of your home. The less money you put down, the higher this ratio will be. The lower this ratio, the more you have to lose by defaulting which will make lenders more likely to approve you for a loan.
- Liquid Assets: This proves that you have the means to make payments, even if you lost your job or didn't work for some other reason for a period of time.
There really is no easy answer for "What credit score do I need to buy a home?" There are several factors and each lender will be different. While there are some hard minimums, buying a home with little money down and a low credit score may be a poor choice. You will generally end up paying more due to having a higher interest rate and having less money to put down meaning you will pay more interest over time.
If you are in the market for a new home, check out this page. We have the team and tools available to help you find your dream home!