What Credit Score Is Needed to Buy a House?
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Real Estate & Personal Finance: What Is Considered a Good Credit Score for a Mortgage Loan?
It's true that when you apply for your mortgage loan, having good credit is better than having bad credit. However, it's also true that while a borrower with 759 credit may pay a higher rate than one with a 760 credit score, another borrower with a 630 score might pay the same rate as one with a 770 score. How your credit score affects your loan terms depends on the type of loan -- and the lender -- you choose.
With a conventional mortgage, the market sets your rate depending on the risk you present as a borrower. "Typically, the higher your credit score, the lower your interest rate will be," explains Josh Manier, a residential mortgage consultant and private loan fund manager. However, the break points vary among lenders. While Bankrate.com notes that a 760 credit score is usually the point at which you get the lowest rate, you might find a lender that gives its lowest rate to borrowers with scores above 700 or 720. At the time of publication, Fannie Mae raises the rate on the loans that it underwrites if your score is below 740. "Your credit score becomes even more important if you need to get a jumbo mortgage or if you need a low-down payment conventional mortgage," adds Manier.
If you intend to buy a property using a low-down payment mortgage underwritten by the Federal Housing Administration, the rules are different. "Since the government is taking some of the risk away from the mortgage lender, most lenders will take a bigger risk on you," says Manier. As of January 2013, the FHA imposed a minimum credit score of 620 for "automatic" underwriting. Lower credit scores require special underwriting and are less likely to be approved. "Just because your score meets the FHA's minimum doesn't mean that you'll get qualified, though," warns Manier. "Banks can also set their own minimums, so if you're on the borderline, you might need to shop around." For example, as of April 2013, a major lending institution primarily serving the Southern United States had a minimum 660 score requirement for its FHA programs.
USDA and VA Mortgages
If you are eligible, the United States Department of Agriculture and Veteran's Administration mortgage programs offer another way to get a mortgage -- and your rate won't depend on your credit score. The programs themselves don't have minimum credit score requirements. However, as Manier points out, "Both the VA and USDA programs rely on lenders to determine their own minimum mortgage scores." That means that if you get a loan, you won't get penalized for your score, but if your credit score isn't in the mid-600s, you might find it hard to qualify. Both programs also have additional requirements that make their application limited. To get a VA loan, you need to be an active-duty service member or veteran, while USDA loans are typically only available in rural or semi-rural areas.
Maximizing Your Credit Score
Regardless of the program you choose, the higher your credit score is, the better off you will be. Your mortgage broker or lender can help you devise a strategy to maximize your score, but there are a few things that you can do right now. Start by ordering copies of your credit reports to look for inaccuracies -- you're entitled to one free report per credit bureau per year and you can order online. If you are making late payments, catch them up and stop paying late. Finally, start to pay down your cards. "While it's okay to carry small balances, using too much credit is a bad sign," points out Manier.