What Credit Score is Needed to Buy a House

What Credit Score is Needed to Buy a House?

What Credit Score is Needed to Buy a House? 

You should have a credit score of at least 580 if you want to buy a house. While there are programs to help you buy a house if your credit score is as low as 500, you’ll find it much easier to qualify with a credit score between 580 and 620.

One of the first factors lenders look at when you apply for any loan in Louisiana, whether conventional or government-backed, is your credit score.

It may look like just a three-digit number, but it tells lenders at first glance if you are financially responsible. Each loan program has a minimum credit score to buy a home. These are requirements that you must meet, but you should also pay close attention to your credit history.

The credit score is the first thing they see. It’s what lenders use to decide if they will move forward with your application. For example, if you have a 500 credit score and applied for a conventional loan, they wouldn’t move forward. But, if you had a 599 score and applied for an FHA loan, they’d process your application.

Once you move past the credit score barrier, lenders dig further into your credit history. They want to see how well you pay your bills, if you overextend your credit, and if you have any public records, such as collections, bankruptcies, or foreclosures. They’ll look at each tradeline, and may ask further questions about your history to determine your financial responsibility.

Knowing your credit score will help you determine which loan program works for you

Minimum Credit Score to Buy a House by Loan Program 

Conventional Loans Require a 620 Credit Score 

Conventional loans are one of the most common loan programs and are offered by banks nationwide.  Conventional loans are a great loan program for borrowers who have a good credit history. 

Conventional loans will require you to have a credit score of at least 620 but often you’ll need to be closer to 680 for it to make sense.

Conventional Loans Require: 

  • Credit Score of 620 
  • Debt-to-Income Ratio Under 50% 
  • Automated Underwriting Approval (AUS) 
  • Current On All Obligations

FHA Loans Require a 500 Credit Score 

FHA Loans were developed by the Federal Housing Administration (FHA) to allow low to moderate-income families to own a home.  FHA Loans are one of the most flexible loan programs around. 

FHA Loans are great for first-time homebuyers because they have flexible credit requirements and low down payment options. 

If you have a credit score of 580 or higher, you’ll only need 3.5% of the purchase price as a down payment. If your credit score is 500-579 you’ll need 10% of the purchase price as a down payment. 

FHA Loan Facts: 

  • 3.5% Down Payment Required 
  • Past Credit Issues Ok 
  • Low-Interest Rates 
  • High DTI Allowed

Learn: What is an FHA Loan? 2022 Guide to FHA Loans

USDA Rural Development Loans Require a 580 Credit Score 

USDA Rural Development loans are the perfect loan program for the home buyer who wants to live in the suburbs or rural areas. The USDA has a unique definition of a rural area: any place with less than 35,000 in population. 

Most suburbs in medium and small-sized cities will qualify for this no down payment loan program. 

The USDA doesn’t have a credit score requirement but we haven’t seen USDA Loans approved under a 580 credit score. Also, you’ll need a 640 credit score in order to qualify for an Automated Approval. If you have under a 640 credit score you’ll need to qualify for manual underwriting. 

USDA Loan Facts: 

  • No down payment required
  • The seller can pay closing costs 
  • Primary Residence Only 
  • Must meet income restrictions 
  • The home must be in an eligible area

Read: The Complete Guide to USDA Rural Development Loans

VA Loans Require a 500 Credit Score

VA Loans technically don’t have a minimum credit score requirement, but most lenders will require you to have at least a 500 credit score in order to qualify. Many of the big box online VA Lenders will require you to have a 620. 

VA Loans are a loan program provided by The Department of Veterans Affairs. If you are an active duty service member or a veteran you may qualify for this awesome loan program. 

VA loans are backed by the VA, which allows lenders to be very aggressive when approving VA Loans. 

VA Loan Facts: 

  • No Down Payment Required 
  • No Private Mortgage Insurance 
  • Low-Interest Rates
  • Flexible Credit Requirements 
  • Must-Have Eligibility for Approval 

Understanding Your Credit Score 

Credit scores start at 300 and go up to 850. While few people actually have an 850 credit score, many do have high scores thanks to their ability to pay their bills on time and keep their debts to a minimum.

Credit scores typically fall into a ‘range’ that gives lenders a good idea of their creditworthiness:

  • 800 – 850 – Excellent
  • 740 – 799 – Very good
  • 670 – 739 – Good
  • 580 – 669 – Fair
  • 300 – 579 – Poor

What Factors Determine Your Credit Score? 

Payment History 35%: How well you pay your bills on time has the biggest impact on your credit score.  If you have multiple 30-day late payments or 60,90 or 120 late payments you will see a huge drop in your credit score.  However, if you’ve made your payments on time for years, you’ll see a much higher credit score. 

Utilization Rate 30%: The next largest factor is how much you are using your available credit. Are your credit cards maxed out? Do you run high balances on them? Once you keep a balance of 30% of your credit limit or higher on your cards, your score begins to decrease. 

Credit History Length 15%: How long you’ve been making debt payments also has an effect on your credit score. This is why it’s never a good idea to close a credit card or other credit account if you’ve had it for a long time. Closing the account will lower your average age of accounts and negatively impact your credit. 

Credit Mix 10%: Your credit mix is the types of credit you have. In order to get the most out of your credit score, you’ll want to have a mixture of revolving accounts, like credit cards, and installment loans, like car payments. 

New Credit 10%:  Finally you need to keep an eye on how much new credit you open at one time. If you go on a credit spree opening a bunch of new accounts, this can cause your scores to drop. Obtaining a lot of new credit can be a red flag to lenders that you may be desperate or unable to make ends meet. 

What Mortgage Lenders Look For On Your Credit 

When you apply for a mortgage your lender’s job is to determine your willingness and ability to repay the loan.  Part of that process is reviewing your credit history to see how you have paid others. 

Your credit score is just one part of their assessment, which will also include your credit history.  

Your lender will look for the following: 

  • Do you make your payments on time? 
  • How much are your current balances? 
  • Are you seeking a bunch of new credit? 
  • How long have you been making payments? 
  • Do you have any items in collections? 
  • Do you have a bankruptcy, foreclosure, or judgements?

While talking about your credit history can be uncomfortable, lenders need to review these things to determine your ability to pay back the mortgage. 

Most of the loan programs lenders offer will provide you with some leniency when it comes to past credit issues, but they will make it harder to purchase a home. 

If you had a bankruptcy or a foreclosure you may need to wait 2-4 years before you are able to purchase a house.  If you have judgments, you’ll need to pay those off before being approved. 

How to Fix Your Credit

Before you apply for a mortgage, learn how to improve your credit score. Because it’s the first impression lenders have of you, it should be as good as possible. You can’t change your credit overnight, so start this process as early as possible – 6 to 12 months is ideal. But at the very least, give your credit 30 – 60 days to improve once you make changes.

Fortunately, credit scores change all the time. As soon as lenders have something to report on your account, they do. If it’s good, your credit score may increase and if it’s bad, it may decrease, it’s that simple.

If you want your score to increase, try some or all of the following:

  • Bring all late payments current – Your payment history is the largest part of your credit score. It makes up 35 percent of your score. One late payment (more than 30 days late) can drop your credit score. If you have more than one late payment or a 30-day late payment turns into a 60 or 90-day late payment, your payment drops more. Do what you can to get current on all payments for the best and most drastic results.
  • Decrease your debt – Your utilization rate (comparison of your outstanding debt to your total credit line) is the next largest portion of your credit score. It makes up 30 percent of your credit score. Ideally, you should have no more than 30 percent of your total credit line outstanding at one time.
  • Don’t close unused credit cards – It seems logical to cancel credit cards you don’t use, but don’t do it. Closing old accounts lowers your average credit age. The less credit history you have, the lower your credit score drops. Open credit cards also help lower your utilization rate or the amount of credit outstanding versus your total credit line which also helps your credit score.
  • Only apply for credit when you need it – Avoid applying for multiple credit cards or other loans at one time. Inquiries hit your credit score for a few points every time you apply, even if you don’t get approved. Hard inquiries also stay on your credit report for 2 years.
  • Correct/dispute any errors– If your credit report has errors, contact the appropriate credit reporting agency. For example, if TransUnion reported a late payment on your car payment when you have proof that you made it on time, you’d file the dispute online with TransUnion. They have 30 days to respond to the dispute.

Improving your credit score takes time. Give it at least a few months, but it may even take longer. The earlier you check your credit the better your chances of having a high enough credit score for loan approval become.

Can You Buy a House With Bad Credit? 

You can buy a house even if you have bad credit. If you find yourself with low credit, you’ll need to save some money so that you have the required down payment or reserves needed to be approved. 

You may need to shop with multiple lenders to find one who will work with your particular credit situation.  Also, there are a few things you can do to fix your credit to make it easier for you to qualify. 

How to Buy a House With Bad Credit 

Your credit score isn’t the only thing you need to consider when buying a home, but it is an important one.  Make sure you know where you stand with credit, and apply for the loan program most likely to get you approved. 

RELATED POSTS

See What You Qualify For

*We don’t sell or spam your information and you will only be contacted in the manner you choose. This info is for Bayou Mortgage Only