There are a lot of good reasons to own a home: You’re investing in an asset that will likely increase in value over time. It can also feel great to establish roots and do some “nesting,” turning your home into a place that you love to spend your precious free time.
But owning a home is a lot of work; it’s not only hard work to maintain a home, but it takes time and effort to prepare and apply for a mortgage.
When applying for a mortgage, one important factor that a lender will consider is your credit score. A credit score is a numerical representation of your credit history and track record; lenders will use it to help determine whether you’re a trustworthy borrower.
Lenders want to ensure that they’re loaning money to someone that will make on-time, regular payments. If you’ve ever wondered what credit score is needed to buy a house, read on. Below, we’ll cover the minimum credit score for a mortgage, the average credit score to buy a house, and how you can improve your credit score if needed.
What Is a Credit Score?
A credit score is one of the primary factors that a lender considers before issuing a loan, whether that loan is for a home, business, or other purpose. Credit scores were created by the Fair Isaac Corporation (FICO®) to help put a simple, numerical representation on a person’s history of obtaining and paying back debt.
There are now other institutions that also calculate credit scores, but FICO scores are the most commonly used1. Experian, Transunion, and Equifax are the three credit reporting agencies which collect information on your history of borrowing, and then FICO or another company amalgamates the information into a score between 300 and 850.
In general, those with strong histories of making on-time payments on their debts will have higher credit scores. Here’s what goes into calculating a credit score:
• Payment history (35%): Considers whether the borrower has made payments on time.
• Credit utilization (30%): The ratio of how much you could borrow versus how much are borrowing. The lower your credit utilization, the better.
• Length of credit history (15%): Histories with debts that have been opened for longer are considered more favorably than debts that have been open for less time.
• Types of credit (10%): Having multiple types of debt is preferable. Installment credit, such as a mortgage or other bank-issued loan, and revolving credit, like a credit card, are both considered.
• New inquiries (10%): Each time a new inquiry on credit is made, there can be a negative effect on credit score. Credit inquiries include opening new credit cards, taking out new loans, and can even happen when a lender does a “hard pull” on your credit history.
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What’s the Minimum Credit Score Needed for a Mortgage?
First, it is helpful to understand how credit scores are generally classified:
• Exceptional: 800-850
• Very Good: 740-799
• Good: 670-739
• Fair: 580-669
• Very Poor: 300-5792
In general, lenders consider borrowers with a “bad” or “poor” credit score as subprime borrowers. Depending on what type of loan you are trying to acquire, it may be hard to obtain a loan with a credit score that is lower than around 600. If you are trying to acquire a conventional loan, you’ll likely need a credit score of at least 6203. With an FHA loan, 580 is the minimum credit score for a mortgage. The FHA’s program was created to get new homeowners with lower credit scores into homes.
Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require that you provide information on your employment, income, and bank accounts. When a lender is willing to take on what they consider to be a low credit score, they may increase their expectations in other areas such as the size of the down payment or the requirements for income.
You can expect that the lowest credit scores that lenders are willing to accept will change depending on the economic environment. During the housing crisis of 2008 and for the years following, it was very difficult for borrowers with credit scores of less than 700 to obtain loans. During better economic times, credit score requirements for borrowers may loosen. Therefore, it is a bit of a moving target to nail down the precise average or the lowest possible credit score one must have to receive a mortgage loan.
How to Improve Your Credit for Mortgage Lenders
Working to improve your credit score before applying for a mortgage could save you a lot of money in interest over time. Lower rates will keep your monthly payments low or even give you the ability to pay back your loan faster.
Let’s look at an example: If you were take out a mortgage on a $400,000 home after putting 10% down with a 4.5% interest rate on a 30-year fixed rate mortgage, your monthly payment would be $1,824 and you would pay $296,663 total in interest over the life of the loan. If you were to take out that same loan with a 5.5% rate of interest, your monthly payment would be $2,044 and you’d pay $375,854 total in interest. The difference of 1% in interest results in almost $80,000 paid over time.
Improving your credit score will take a little bit of time, but it can be done. Here’s how:
1. Check for errors on your credit report. Reporting errors are quite common, so be certain that your credit history doesn’t mistake a missed payment or report a debt that’s not yours. You can get a free credit report once a year from each of the three reporting agencies: Transunion, Experian, and Equifax.
2. Pay all of your bills on time. If you haven’t been doing so, it could take up to six months of on-time payments to see a significant improvement.
3. If you do not currently have credit established, an easy way to do so is by opening a credit card. But, only do this if you are prepared to use the credit card responsibly. This means paying back the card, in full, each month. Do not simply pay the minimum payments. If you are having trouble qualifying for a card, ask your bank about a secured credit card. With a secured card, you put a cash payment down that will work as your line of credit proving you can manage a credit card.
4. Request to increase the credit limit on one or all of your credit cards. This will increase your credit card optimization ratio by showing that you have lots of available credit that you don’t use. It is best to keep your credit optimization ratio below 30%, meaning you’re only using 30% of your available credit at any time.
Understand that this number can be assessed at any time during the month, not just on the day that you pay your bill. Even if you pay your card in full every month, if you’re consistently using more than 30% of your available limit, you could get dinged.
5. If you are working to pay off credit cards, don’t shut them down once you’ve paid them off. Keep them open by charging (and paying back) a few items to the card every month. Remember, sources of debt that have been in use for longer are preferable to ones that are new. For example, if you have two credit cards, and each have credit limits of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off, and keep it open, your credit utilization would drop to 20%.
6. Consider obtaining a personal loan. If you have multiple credit cards and are struggling to manage them and pay them off, this might be a good solution. A personal loan will ideally have a lower rate, which may help you to pay the loan back faster.
Another option for those with lower credit scores is to have a co-signer on your mortgage loan. If this person has a better credit score and financial situation than you, it could greatly improve the rate that a lender will offer. Only go down this route is this is a relationship that you can trust completely.
Once you feel that your credit score is ready, be sure to shop around for a home loan at several different lenders. You want to be sure that you’re getting the best rate given your personal financial situation, and not every lender has the same criteria. Know that even with credit scores that aren’t perfect, there are options for people who want to be home owners; it’s just a matter of seeking out those options.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s