What credit do you need to buy a house

October 4, 2021

What credit do you need to buy a house

Credit score forms an integral part of the mortgage buying procedure. It determines your ability to secure a mortgage loan. It means that the stronger your score, the better the chance of securing a mortgage at an attractive interest rate. Its importance cannot be overemphasized as it also influences your interest rate, down payment requirements, and other terms of your mortgage, apart from affecting your initial qualification for a loan.

Lenders make use of your credit score and other relevant details obtained from your financial history to determine whether you qualify for a home loan. The credit score for buying a house relies on the type of mortgage loan you’re applying for and your lender. Though it’s possible to obtain a mortgage loan with low credit, you typically need outstanding credit to qualify for the best terms.

When looking to get a mortgage, the priority is to know what credit score is needed to buy a house. Knowing your credit score helps to determine both your eligibility for the loan and the interest rate you get.

Why Do You Need Credit Scores for Buying A House?

The simple reason why lenders evaluate your credit history, including your credit score when you’re trying to buy a home, is to evaluate the risk involved. Credit scores indicate the risk in the eyes of most lenders. It serves as a leading indicator for lenders to know whether the borrower is likely to repay the loan or not. It implies a lower score means higher risk and, as a result, will ask a borrower with a lower credit score to pay a higher rate.

With a low credit score, you tend to pose a risk for a lender. The way out here is to increase your interest rate to protect yourself. The high interest rate compensates for the different risks—that chance you won’t pay your loan or might foreclose on the house. On the other hand, a higher score indicates the borrower’s likelihood of paying the bills on time and can be expected to repay the mortgage back. With this, a borrower can stand to enjoy a lower interest rate.

Do You Need A Good Credit Score For Getting a Home Loan?

The level of credit score you need to buy a house depends on your lender and the type of mortgage loan you’re applying for. This will determine which loan options you can apply for as a homebuyer. A credit score ranges from 300 – 850, which is a number used to indicate your eligibility and trustworthiness.

The best and recommended credit score you need to buy a house is 760 or higher. This credit score gives the lenders the rest of the mind that the borrower is likely to repay the loan on time, which boosts borrowers’ chances of qualifying for a mortgage. According to reliable data, borrowers with a high credit score tend to get the best interest rates on a home loan. The least minimum credit score you need to buy a house fall between 500 – 680, subject to the type of the mortgage program. Some loan types require minimum scores as high as 640 for conventional loans, while others go down to 500, comprising some FHA loans. Besides, other factors are considered to assess your credit score, whereas conventional and government-backed loans have different credit score requirements.

The following factors are taken into consideration by lenders when evaluating your credit score.

Employment history and salary
Down payment
Tax returns for the last two years
Debt-to-income ratio, which defines how much of your income goes toward paying off debt each month
Clean credit history, including charge-offs, debt, bankruptcies

Can You Get A Mortgage With Bad Credit?

A bad credit score can work for securing a mortgage loan, and a bad credit score for a mortgage is below 620. With this credit score, it’s possible to get a mortgage, but you’ll have to pay higher interest rates and have higher monthly payments.

There are instances you may still apply for a mortgage, even if your credit score is lower than the minimum required. In this case, you need to add a co-signer to the mortgage, utilize a bigger down payment or lower your debt-to-income ratio.

What Are The Ways To Improve Your Credit Score to Buy a House?

Are you considering applying for a mortgage? The first step to take is to check your credit score to see if there’s room for improvement. Some factors determine a credit score, including your repayment history, the total balances on your accounts, account duration, and how many times you’ve applied for credit in the past years. When you take up the responsibility of improving in any of these areas, it can help increase your score, thus positioning you for a better mortgage.

In actualizing this, the first step to take is to request your credit reports and look for errors, which could potentially bring down your credit scores. Many platforms offer free credit reports, which you can use to get your credit report. In the process of checking the credit report, and you find inaccurate information, you can file a dispute with the creditor and the credit reporting agency. When you’re decisive in eliminating every error may help enhance your credit score.

The following steps can be taken to improve your credit score before you apply for a home loan. Next, get to know how credit scores work. We’ve listed what factor influences your credit score and how to make improvements before applying for a mortgage:

Pay Off Outstanding Debt on Time: Perhaps the most important aspect is determining the type of your credit score. Paying the outstanding debt you owe and pay on it until it’s paid in full bills can increase your credit score. Doing this is beneficial in taking care of your debt. For instance, if your overall debt responsibilities go down, you have room to take more, making you less risky in your lender’s eyes. Have a monthly reminder setup or automatic payments that can help you remember.
Credit utilization: The amount of available credit you’re using is what describes credit utilization. Ensure to reduce some of your loan balances and keep your credit card balance to 30% of your credit limit or less.
Obtain your credit scores through your bank, credit card issuer, or other sources, and appraise the credit scores in case of errors and disputes.
Length of credit history: A long credit history positions in the eyes of lenders as a person who have experience managing debt. Keeping your credit cards open, even if you rarely use them, boosts this part of your credit score.
Limit any applications for new credit to a three- to six-month window and pay down credit card balances if you’re carrying debt.
Prompt payment of your bills is essential, and you may use issuer or calendar alerts to keep track of payment due dates.
Keep your older accounts intact because closing any accounts with balances can affect your credit utilization ratio. Ensure to keep them open.
Limit Your Application For Too Much Credit: Discipline yourself by resisting any urge to apply for more credit cards as you try to build your credit. Doing this often puts a hard inquiry on your credit report. Too many hard inquiries negatively affect your credit score.
Equip yourself with relevant knowledge that can help you to write a letter of explanation for any negative items on your credit reports.

Requirements For Credit Scores by Mortgage Loan Type

While aiming to know your credit score for buying a house, it is also important you’re aware of the types of mortgage loans available. There are various types of mortgage loans available, and each one has its own minimum credit score requirement. Many other stricter criteria are considered by many lenders and credit scores, which they use to determine your credibility. These are the four main types of available mortgage loans:

Conventional loans
FHA loans cover those from the Federal Housing Administration
USDA loans, which are established for rural properties and are backed by the U.S. Department of Agriculture.
VA loans are designed for military members and veterans.

These loans have different credit score requirements for each of them, and they are listed below:

FHA loans: These loans are insured by the Federal Housing Administration and maybe the best option if you have a lower credit score or don’t have much cash prepared for a down payment. The minimum credit score for an FHA loan is usually 500, with an average score of 680.
Conventional loans: It’s recommended you have a credit score of 620 or higher when you apply for a conventional loan. You might be offered a higher interest rate if you have got a score that is below 620. The minimum credit score requirement is between 620 to 640.
USDA loans: It’s recommended you have a credit score of 640, which is preferred when you apply for a conventional loan, while the minimum is 580. There’s flexibility to go lower in certain situations. The U.S. Department of Agriculture ensures these loans. These loans are designed for low- and moderate-income homebuyers looking to purchase a home in rural areas.
VA loans: These loans are insured by the United States Department of Veterans Affairs and have no credit score requirement. VA loans were created for select members of the military community, their spouses, and other eligible beneficiaries. No need to have a minimum credit score requirement to access these types of loans, but lenders require you have a score of 620 or higher to access these loans.
Jumbo loans: These loans are categorized as non-conforming mortgage loans and often carry higher loan amounts than conventional loans. Jumbo loans may require a credit score of 700 or higher because of the much risk associated with bigger loans.

What Kind of Credit Report and Score Do Lenders Use?

We have different forms of your credit score, liable to the issuer of the score, whether it’s a bank, FICO, VantageScore, or even from some lending industry such as auto, mortgage, credit card.

Most lenders based their finds on the various credit report which shows credit details from multiple credit bureaus. The credit score is instrumental in offsetting risk associated with the loan and ensure they’re getting the most accurate picture of a mortgage borrower.

As an alternative, they may adopt a “residential mortgage credit report,” which consists of other relevant important details about your financial life like rental history or public records. These reports show the borrower’s credit details from multiple bureaus such as TransUnion, Experian, Equifax, or all three.

In many cases, a potential mortgage lender sees your credit score differently as you see it as a consumer, possibly through your bank or credit card company. Again, having less debt makes you less risky to the lender, and you can take more on through a mortgage.

You may have several different mortgage loans to choose from if you’re a good credit score status. But if your credit score is considered bad or fair, you have got a limited option.

What Are the Other Things To Consider When Buying A House

Debt to Income Ratio (DTI)

It is the percentage of your gross monthly income that you’ve budgeted to pay off your debt.

To calculate your DTI, divide the amount of your recurring debt (rent, car payments, etc.) by your monthly income. Having a low DTI is beneficial as it gives you a better chance of accessing a low-interest rate. For example, if your monthly income is $1,500, and you have a debt of $500 per month, your DTI is $500/$1500 = 0.33, or 33%.

The acceptable DTI is something that is less than 50%, and anything less than this makes you qualify for a mortgage. In simple terms, the lower your DTI, the more loan options will be made available to you.

Loan to Value Ratio (LTV)

Lenders adopt it to evaluate the level of risk involved in lending to borrowers. It is obtained by dividing the amount of loan divided by the house purchase price.

Income and Assets

Even your lender wants to play safe. They have an interest in you maintaining steady employment. Lenders often require borrowers to provide two years of proof of income and assets. The interest rate you’re offered is affected by your income earned.

Credit score forms the important basis that determines your position when buying a house because it shows lenders your ability to pay off debt. Take much time out in improving your credit score: ideally, six months to a year before you start shopping for a loan. With this post, you’ve different loan options to pick based on your credit score level.