Know the minimum FICO score to buy a house

When buying a home, one of the most important things that will have a huge impact on your ability to get a mortgage (and on its rate and terms) is your credit score. So, what is the minimum FICO score to buy a house? This guide will help you determine your credit score, know all your home loan options, and guide you on how to improve your credit score before applying for a loan. 

The fact is that all mortgage lenders evaluate your credit score, employment status, income, and debt, to assess your ability to realistically afford your dream home. 

While it may be possible to get a loan with a bad credit score, it will not get you the best loan rates and terms. Additionally, you will be required to pay a higher down payment in all probability. 

There is no doubt that having a higher score ensures lower expenses and financial burdens. And, makes your mortgage loan more affordable as well as manageable. 

How to understand your credit score before a loan application?

To find out the minimum FICO score to buy a house for your financial situation, you need to determine your credit score by looking at your credit report which details your credit history. 

According to financial experts, you should check your credit score and credit report at least once a year and immediately report any errors to the credit reporting agency – Equifax®, Experian™, and TransUnion®. A mistake on the report could lower your score and your chances to get the best loans out there. The good thing is that you’re entitled to a free credit report from the agencies once a year.

It’s smart to understand your credit profile thoroughly. Once you do, you can assess all your options – whether you’re qualifying for a conventional loan or a government-backed loan.

Understanding FICO score vs. credit score

The FICO score, developed by the Fair Isaac Corporation, is one of the most reliable scoring models. It’s used by national credit bureaus to collect information from loan lenders, banks, and other financial companies in order to formulate your credit score.

What type of financial information does it consider to build your score?

• Whether you’re in the habit of making on-time payments
• Do you have new credit accounts
• The length of your credit history
• How do you utilize your credit
• What type of credit do you have

What credit score is required to purchase a house? 

In general, a higher credit score is preferred. At the minimum, individuals with a credit score as low as 500 could be considered for an FHA loan, provided they make a 10 percent down payment. For a credit score of 580, a down payment as low as 3.5 percent would be required. So would be private mortgage insurance. If you can raise your score to 620, you may be eligible for a conventional loan or VA loan.

According to a recent FannieMae analysis, first-time homeowners have an average credit score of 746.

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What are the minimum credit score requirements for different loan types?

Simply put, your credit score determines your creditworthiness. It ranges from 300 to 850. The higher the score, the greater your chances of getting the best type of mortgage, the best loan terms, and the best interest rates. Any score above 670 is a good score, between 740 and 799 is a very good score, and above 800 is an exceptional score. It may even get you a no-down-payment mortgage through a commercial or private lender. 

Keep in mind that it’s ideal to have a credit score of 740 or above. It would mean a lower down payment, an attractive interest rate, and no compulsion for private mortgage insurance.

Keep in mind that conventional and government-backed loans have varied credit score requirements. So, let’s explore each one carefully. 

Conventional loans

Conventional loans are most suitable for borrowers with excellent credit scores and good savings for a down payment. The minimum conventional loan requirement is a credit score of 620 or above. In cases where the score falls below 620, your loan application might not get approved. Or, you’ll have to settle for a higher interest rate, leading to a significant increase in your monthly payments.

FHA loans

This type of Federal Housing Administration-backed loan is suitable for borrowers with a lower credit score or those with not enough savings for a down payment. The minimum FHA loan requirement is generally 500 to 580. A higher score will of course help you get a better FHA mortgage rate. 

VA loans

This type of government-backed loan by the U.S. Department of Veterans Affairs is for veterans, qualified servicemembers, or their spouses. While there may not be a VA loan requirement, any score above 580 (ideally low- to mid-600s) is generally sufficient for such a loan. However, VA lenders may have their own credit requirements.

USDA loans

The government-backed USDA loan is suitable for those who plan to live in a qualified rural or suburban area. Additionally, they should have an income below 115% of the area’s median income. You can expect a minimum USDA loan requirement of a credit score of 640.

How do credit scores affect mortgage rates?

The correlation of your score with the loan rate you can expect can be best understood with the help of a table. 

Suppose you apply for a 30-year fixed-rate mortgage for a loan amount of $286,400. These would be your terms.

Note: APR stands for Annual Percentage Rate. The monthly mortgage payment and interest total are approximate values.

Is there a correlation between states and average credit scores?

There is variation in the minimum credit score requirement for Americans across different states. For example, according to a 2022 Experian report, Minnesota boasts the highest average credit score of 742, closely followed by Vermont at 736 and Wisconsin at 735. On the other hand, Mississippi and Louisiana have the lowest average credit scores, with Mississippi at 681 and Louisiana at 689.

What is the best way to improve your credit score before buying a house?

If you’re looking to buy a house and for qualifying for a mortgage with the best terms, you need to take some steps to increase your credit score. Here are some smart ways to go about it: 

Pay off any outstanding debt ASAP

Identifying any outstanding debt you owe and making consistent payments until it’s fully paid off is one of the most effective methods to boost your credit score. It reduces the perception of risk from mortgage lenders. Secondly, it enhances your credit utilization ratio, which compares your spending to your total credit limit. 

To calculate your credit utilization, divide the amount you owe on your card by your available spending power.

The less you rely on your credit card, the more favorable you appear to the lenders.

Make payments regularly, and on time

When assessing your creditworthiness, lenders gauge your ability to consistently meet payment obligations. It’s crucial to demonstrate reliability across all bill payments – not only mortgages and auto loans but also utilities and cell phone bills. Always pay your bill on time. 

Avoid applying for too much credit

To establish a solid credit history, it is advisable to refrain from applying for additional credit cards. Remember that each funding application triggers a hard inquiry on your credit report. Too many hard inquiries can have an adverse impact on your credit score.

Which other factors do lenders consider for mortgage preapproval?

Apart from evaluating your credit history, lenders consider a few other factors. 

• Employment history and income: Lenders require evidence of a dependable income source and documented proof. Having a consistent employment record of two or more years with the same company is advantageous. Additionally, you should be prepared to provide tax returns from the past two years.
• Down payment: Increasing the down payment amount can enhance your chances of loan approval and secure a more favorable interest rate. However, it’s important to avoid depleting your emergency savings.
• Debt-to-income ratio: Lenders consider your debt-to-income (DTI) ratio as a crucial factor in determining an affordable monthly mortgage payment. A high DTI ratio could limit your options, even if you possess a good credit score and steady income.
• Assets: Having significant savings and other valuable assets such as investment or retirement accounts can make you a more appealing borrower overall.

Key takeaway

Because it provides a history of how you’ve managed debt, your credit score is crucial when you’re buying a home. Additionally, having good credit makes the home-buying process simpler and more economical because you can qualify for a lower mortgage interest rate the better your credit score is.

Written by Ramona Sinha. August 24, 2023

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.