Your credit score is an integral component of the homebuying process. Lenders use it to assess your financial situation and decide how much risk they’re willing to take by providing you with a mortgage. A good score can make it easier for you to qualify for the loan you need at the best interest rate available.
When applying for a home loan, the credit score requirements vary based on the type of loan. For instance, an FHA loan requires higher credit than conventional mortgages while VA and USDA loans have different minimum credit score requirements.
What is the minimum credit score required to buy a house?
While there is no set minimum score required, most borrowers require at least 620. While it’s possible to obtain government-backed loans with lower scores, most borrowers have at least this much debt in their account.
If your credit score is low, there are steps you can take to improve it before applying for a mortgage. Make timely payments on debts and reduce credit card balances to boost your chances of approval.
Paying off credit card debt is the fastest way to improve your credit score, though it’s best not to close the accounts once they’re cleared. Paying down debt helps build credit – which is essential for getting a low mortgage rate.
Your credit score, which ranges from 300 to 850, is an indicator of your financial capacity to pay back debts. A higher score indicates you’re more likely to make timely and on-time payments – which lenders look for when deciding whether or not to grant you a mortgage.
When applying for a mortgage, lenders will pull your credit report from the three major bureaus – Equifax, Experian and TransUnion. These reports contain details about your credit history such as when payments have been late and what balances remain outstanding on lines of credit.
Each credit bureau utilizes a slightly different version of the FICO scoring model to assess your creditworthiness. These models differ in how they weigh credit utilization, or debt owed relative to available resources.
The FICO 7 model places less emphasis on credit utilization than its two counterparts, yet it’s important to remember that your score can still be affected by how often you miss or pay late payments.
Another factor affecting your credit score is the variety of accounts you have (known as your credit mix). This includes both revolving credit and installment accounts like student loans or auto payments).
Your credit mix can have an effect on your score, but it is possible to improve it with some timely payments. You may also increase your score by paying off old debts and keeping a low debt-to-income ratio.
If you’re uncertain of your credit score, request a free copy of each report from each bureau once annually. These reports can help guide you in taking steps to improve your credit.
