What Credit Score Do I Need To Buy a Home?

A common question many home buyers have is, “What type of credit score do I need to buy a home?”

And that’s a great question. Your credit score will affect whether you can buy a home. Not only that, it will determine how much you can afford and what your overall mortgage payment will be.

The short answer to your question: it varies.

But I’m not going to leave you hanging with that answer. In this article, we will explore ways to find your credit score, what credit score you REALLY need to buy a home (the answer might surprise you), and how those requirements can be bent so that you can buy a home.

Let’s get started…

What Is Your Credit Score?

Your credit score is a simple numeric representation — often between 300 and 850 — of the amount of risk you represent to a lender or bank. The higher your credit score, the less perceived risk.

When you have a high credit score, banks or lenders believe that you will pay your mortgage on time, every time for the entirety of the loan.

The lower your credit score, the higher the perceived risk. The bank or lender fears you may end up defaulting, or worse, go into foreclosure.

Lenders often evaluate your creditworthiness based on a FICO score. An individual person has three credit FICO credit scores — one from each of the main credit bureaus; Experian, TransUnion, and Equifax. Each credit bureau tracks and records your credit information. They then use this information to calculate a FICO credit score for you.

What’s In A FICO Credit Score

There isn’t one standard for how a FICO credit score is calculated. The three main credit bureaus, Experian, Equifax, and TransUnion, all have their own proprietary systems and algorithms for calculating your score.

These algorithms are like the closely guarded Kentucky Fried Chicken secret recipe or the Krusty Krab’s recipe. The public has no clue exactly what goes into them.

via GIPHY

But…

… we do know what the FICO credit score is composed of. Just not how it’s calculated. Your FICO score is composed of five different variables, each with a specific weight in calculating your credit score.

• Payment History – 35%
• Amounts Owed – 30%
• Length of Credit History – 15%
• New Credit – 10%
• Type of Credit Used – 10%

So, we know it’s important for people to make their payments and reduce their debt if they want to have a higher credit score. What’s unclear is how one missed payment will affect your payment history score. Or how opening a new credit card will affect your new credit score.

Finding Your Credit Score

Do you know what your current credit score is? If not, it’s important that you start by finding out. Before even talking to a lender, it’s worth doing some research on your credit score.

This way, you can self-assess whether you can get approved for a loan. There is nothing worse than trying to get a mortgage only to be denied and then take a small credit hit for having it checked.

There are plenty of websites that will give you your credit score for free. Here are a few sites that will give you your score:

• From the Credit Bureaus – most preferred
• Credit Karma
• Credit Wise

Your best option is to request a free copy of your credit report from each of the three major credit reporting agencies. This will ensure you are seeing exactly what a lender sees. You can request them once each year at AnnualCreditReport.com (same link in #1).

If for some reason you can’t request these reports, use a free tool like Credit Karma or Credit Wise. Just be cautious of relying too heavily on these platforms.

Warning: these sites can be inaccurate by as much as 30 points or more. Consumers have reported that these sites often have a score higher than their FICO score.

So What Credit Score Do You Need?

There’s no concrete answer, but it’s recommended that you have a credit score of at least 660. This will help you qualify for most loan programs.

If you’re below 660, there is hope…

… You can still get a mortgage.

The one caveat is that you might end up with a high interest rate and poor loan terms.

To qualify for a conventional mortgage, you will likely need a credit score of 620 or higher. Loans backed by the Federal Housing Administration, like the FHA loan, requires a minimum score of 500 to qualify for a ten percent down payment or a minimum 580 for a 3.5 percent down payment.

Before you head off to apply, it’s important to understand the minimums.

Yes, you can get an FHA loan with a credit score of 580, but many lenders may not approve you. That’s because lenders will put into place overlays, or requirements in addition the minimum requirements.

For example, while you can get an FHA loan with a credit score of 580, a lender may require that you have a higher credit score, zero debt, or a substantial savings.

And that’s because most lenders aren’t interested in keeping your loan.They’re far more likely to sell it to another entity, whether that be a bank like Wells Fargo or the government-sponsored enterprises Fannie Mae and Freddie Mac.

In this way, lenders actually view your mortgage as a product. The entities to which your lender sells mortgages each have their own acceptance standards, including minimum credit requirements.

They don’t want bad mortgages — remember all that happened with the housing mess of 2008?

That’s where minimum score requirements for conventional loans come into play. A lender could accept a credit score below 620 for a conventional mortgage, but Fannie Mae wouldn’t buy that loan, and the lender might be stuck with it unless it can find another buyer.

For FHA and USDA loans, lenders’ hands are tied from the get-go. They can’t give them out at all unless the homebuyer meets these minimum credit score requirements.

Takeaway

According to the requirements laid out by lenders and the Federal Housing Administration, you can get a mortgage with a low credit score. But, it’s unlikely lenders will make it easy. There will often be additional requirements to getting a mortgage with a low credit score, like a large savings or no debt.

Plus, you may have unfavorable loan terms and interest rates that could make your mortgage really expensive and not worth it.