Looking for a new home is exciting—you explore new locations, different home features, and potential new possibilities for your life. However, buying a new home requires completing paperwork, checking your financials, and typically getting a loan. Reviewing your credit score is one of the critical tasks you’ll need to do before buying a home.
While there are different credit score models, 90 percent of lenders use the FICO credit score, so knowing your score is essential before applying for loans. Your FICO credit score can be between 300 to 850. It represents how likely you’ll pay back a loan according to schedule. Higher credit scores increase your chance to secure a mortgage with a low-interest rate. Having a mortgage with a low-interest rate can save you thousands of dollars over the loan term.
Fortunately, you don’t have to have a perfect credit score to qualify for a mortgage with a low-interest rate. Most experts state that a credit score of 760 or higher will increase your chance for a lower interest rate mortgage and help show lenders that you are creditworthy.
What if your credit score isn’t that high? You can still be approved for some loans but expect higher interest rates. Do you need to improve your credit score to get a loan, or have you recently been denied a loan? The Credit Score Improvement Helpline at (888) 537-4633 will connect you with a credit expert to discuss your options for raising credit score.
What Credit Score Range Do You Need to Buy a Home?
Many loans are insured by government organizations or backed by Fannie Mae and Freddie Mac. For these types of loans, lenders can’t accept credit scores lower than these different groups’ minimum credit score.
However, lenders can require credit scores to be higher than the minimum credit score set. Most lenders have a base minimum credit score that they won’t go below. Therefore, it’s important to know what lenders require and not rely solely on the minimum score allowed.
What is the minimum score you need?
The minimum score can vary depending on the type of loan you’re applying for. You’ll want to have a FICO credit score of at least 620 to be considered for a home mortgage loan. Since lower credit scores typically involve higher interest rate loans and a down payment, you may want to consider raising your score before applying for a loan.
You may still qualify for a loan if your credit score is below 620. If you try to prequalify for a loan, if the rate is high, you can either work on improving your score first or try to get a Federal Housing Administration (FHA) loan.
FHA home loans are typically easier to qualify for and have lower requirements than a conventional loan, although you may need to pay more closing costs with an FHA loan. FHA loans typically have more lenient requirements because an agency insures them. These loans make it possible for people to become homeowners even when they have lower credit scores or little money saved.
You usually can get an FHA loan with a 3.5 percent down payment if your credit score is 580 or higher. Your down payment will increase to 10 percent if your credit score is less than 580.
You likely won’t qualify for a mortgage if your FICO credit score is below 500.
What is considered a good credit score?
If you want to qualify for a mortgage with the lowest interest rates, you’ll want a FICO credit score of 760 or higher. Lenders do consider other factors in addition to your credit score when setting the terms of the loan. For instance, your income, employment history, and debt-to-income ratio will also be considered in conjunction with your credit score.
How Do You Increase Your Credit Score Before Buying a House?
Fortunately, you can improve your credit score. You’ll need to check your credit score and credit report. You can usually get a free copy of your credit score from your credit card company. You’re allowed to get a free copy of your credit report once every 12 months from AnnualCreditReport.com. If you’re purchasing a home with someone, both of you should check your credit scores and reports.
After receiving your credit score and report, review the report to make sure there aren’t any errors. Look for identity errors, incorrect account status, and errors with account balances. You can file a dispute for free to correction any errors or accounts which show up and don’t belong to you.
If there aren’t any mistakes and you need to improve your score, there are several actions you can take. The most critical step is to pay all your bills on time every month. Paying on time shows lenders that you are dependable and can pay back your debts. This one factor has the largest impact on your credit score.
Other actions you can take to raise your credit score include:
- Reducing your credit utilization rate by keeping your credit card balances low throughout the month
- Making small payments on your credit card throughout the month, so the balance doesn’t get too high
- Avoiding applying for any new loans or other forms of credit in the months leading up to applying for a mortgage
- Avoiding closing any credit accounts. When you closing an account, you reduce the amount of credit available to you, which increases your credit utilization rate
For more information on how to raise your credit score in just 30 days, click here.
Higher Credit Scores Help You Qualify for Low-Interest Rate Loans
A perfect credit score isn’t required to get a low-interest loan. But you’ll have the best chance at qualifying for a low-interest loan with a FICO credit score of 760 or higher. You’re likely to be considered for a home loan with a FICO credit score of at least 620, although you’ll probably have a higher interest rate. You may meet the requirements for an FHA loan if your credit score is in the 500 range. However, if your score is less than 500, you may want to focus on raising your credit score before applying for a loan.
If you’re struggling to be approved for a home loan, the Credit Score Improvement Helpline at (888) 537-4633 can connect you with a credit expert to discuss your options for raising your credit score.