What Credit Score Do I Need to Buy a Home?

 

Buying your first home is one of the most exciting milestones you can achieve: you’ve finally reached a level of personal and financial independence where you can comfortably purchase property and build equity.  Congratulations!

However, it can also be incredibly stressful, and your head may be swirling with questions: Is this a good time to buy?  How do I know if I’m getting a good deal? What is a mortgage and how do I get financing? Where should I even start?

 

 Luckily, this blog will help break down some of the more complex topics of home buying or selling.  Our goal is to help you feel more confident in your decisions and make the process a smooth one!

 

So let’s get started: you’re thinking of budgeting for a home purchase, but you don’t know your credit score.  How can you find out what your score is and does it play a role in buying a house? Is there a recommended score for home buying?

 

Where can I find my credit score?

 

There are many free resources that will provide access to your credit report.  My favorite tools for viewing my credit scores are Credit Karma and NerdWallet, as they provide valuable insights into what factors impact your scores and how you can improve them.  They’ll also send you updates every time a score changes to keep you informed and protect against any unapproved activity on your accounts.

 

If you’d rather not make a free account, most credit card companies allow you to view your credit score on their website, and you can also order your annual free credit report here.

 

Once you know your credit score, you can better understand how that number impacts your buying power.

 

How high should my credit score be if I want to buy a house?

 

This is a tough question: there is no specific score required to buy a home.  Whether it’s a VantageScore or FICO credit rating, your score helps you understand what financing options you’ll have rather than providing a definitive cutoff for home buying.

 

Ultimately, a score over 500 can potentially receive funding, and scores over 740 have the most options.  Overall, your credit score will play into the loan financing, down payment, and mortgage rates you will need.  The healthier your credit score, the more options you will have.

 

Why is a healthy credit score important for buying a home?

 

Mortgage lenders use credit scores as a predictor for whether or not you will repay your home loan.  Your credit score is made up of many factors that demonstrate whether you are a responsible creditor who will pay his or her mortgage payments on time.  

 

For instance, a higher score signals reliability, as you have paid your credit card bills on time, have not spent to your card limits, etc.  If you do have a lower score, you may still find a lender willing to accept your loan, but you will experience higher interest rates to make up for the “risk” of investing in your purchase.

 

Maintaining healthy credit is an important step in ensuring you get the best loan options for home financing.

 

What types of loans can buyers expect for their mortgage?

 

The three loan types you will typically see are Conventional, FHA, and VA.  Here are some basic descriptions of each:

 

Conventional Loans

 

Conventional loans are not backed by the government (FHA or VA), so they are reserved for individuals with higher credit scores.  Due to the risk of taking an uninsured loan, lenders often require higher down payments. But, buyers who put at least 20% down do not have to buy mortgage insurance and can expect a lower monthly payment.  

 

Conventional loans can be conforming or non-conforming/jumbo, depending on their amount and whether they “conform” to the guidelines set by Fannie Mae and Freddie Mac, with conforming loans having lower mortgage rates and non-conforming loans having higher amounts and stricter requirements.

 

FHA Loans

 

The Federal Housing Administration insures your loan in case you are unable to pay a private lender.  Buyers can use FHA loans when they have lower credit scores or to purchase homes that require renovation (also known as a 203(k) loan), and the loans can sometimes lower mortgage insurance payments.  You can typically expect a 3.5-10% downpayment with an FHA loan: the lower the credit score, the more money required. 

 

VA Loans

 

VA loans are available for any active duty military, veterans, or eligible spouses of military personnel.  The U.S. Department of Veterans Affairs insures these loans, and they often require no down payment or mortgage insurance.

 

What type of loan can I expect with my credit score?

 

The infographic below summarizes the types of loans and interest rates you may secure with each credit score.  

 

Note: There will always be outliers in this information, but feel free to use this as a general guide to give you an idea of what to expect in your situation.

 

Credit score home buying

 
 
 
 

In Summary

 

Your credit score is a great indicator of what type of financing you could receive in the home buying process, but there are options for buyers in most categories.  If you’re thinking of purchasing a home, you may want to start with a good look at your credit score: is it in a healthy range? If not, can you take the time to work on repairing your credit?  

 

When looking to get the best loan options, you should try to maintain a credit score above 740.  In reality, experts regard scores of 620-640 as the threshold to obtaining a conventional loan. If your score is less than ideal, you can always work on repairing your credit or look at FHA, VA, and other loans rather than conventional ones.  It may take a little more time to prepare to buy, but doing so can save you some cash and heartache when you finally find your dream home.

 

Do you still have some questions?  Are you ready to start your home buying adventure?  Please contact me so I can help you find your dream home!

 

 

Posted on November 15, 2019 at 4:09 pm
Bob Showalter | Category: First Time Homebuyers Guide | Tagged , , , ,

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