What Credit Score Is Needed To Buy a House?

Unfortunately, there is no single credit score that can guarantee a borrower a mortgage at a rate she is comfortable with. This is because each lender is free to set their own credit score requirements, based on their past history working with various profiles of borrowers. Nonetheless, it can be helpful to get an idea of the required credit score ranges in order to anticipate what types of loans a borrower can be eligible for.

While borrowers do not need perfect credit in order to secure a mortgage, according to CNBC.com, prospective home buyers should aim to have credit scores of 760 or greater to qualify for the best interest rates on mortgages. This is because credit scores estimate the risk that borrowers will not repay the loan, and potential lenders will reward a higher score with more choices and lower interest rates.

Generally, the minimum credit score requirements vary based on the type of loan and who insures the loan. Conventional and jumbo loans are not insured by the government and as a result, often have higher credit score requirements compared to loans backed by the government, such as VA loans. 

1. Conventional Loan

Minimum credit score required: 620.

Conventional mortgage loans aren’t insured by a government agency, like the U.S. Department of Veterans Affairs or the U.S. Department of Agriculture. Instead, these loans follow standards set by government-sponsored mortgage loan companies Fannie Mae and Freddie Mac. Conventional loans may be secured by one of these companies or a private lender. These loans are more affordable and require a minimum 620 credit score, and down payment requirements vary.

Conventional loans are divided into conforming or nonconforming loans based on whether they “conform” or follow lending rules set by Fannie Mae and Freddie Mac. Conforming loans follow the standards set by these organizations, such as maximum loan amounts, while nonconforming loans may exceed those limits and are considered “jumbo” loans, which we discuss the credit requirements for next.

2. Jumbo Loan

Minimum credit score required: 680.

A jumbo loan exceeds the maximum loan amount limits set by the Federal Housing Finance Agency. As a result, these loans are not eligible to be insured by Fannie Mae or Freddie Mac, which means lenders take on more risk in the event that a borrower defaults on payments. Due to the larger loan amounts and riskier nature of these loans, borrowers need to meet higher credit score requirements of at least 680. As with conforming conventional loans, down payments vary.

3. FHA Loan

Minimum credit score required: 500 (with 10% down) or 580 (with 3.5% down).

An FHA loan is insured by the Federal Housing Administration and an option for borrowers who are deemed a higher risk due to low credit scores and a very small amount of funds to put toward a down payment. The credit score requirements differ based on how much money you plan to put down. Borrowers with higher credit scores can qualify to make a lower down payment.

Here’s the rough breakdown:

• Minimum 500 credit score, needs 10% down payment.
• Minimum 580 credit score, needs 3.5% down payment.

For a down payment less than 20%, lenders most likely require the borrower to take out primary mortgage insurance (PMI) to cover the cost in the event of a default. PMI is required even for conventional loans and can cost as low as 0.5% to upwards of 2% of the loan amount annually, according to Experian.

4. VA Loan

Minimum credit score required: None officially, though many lenders prefer 620.

A VA (Veterans Affairs) loan is insured by the U.S. Department of Veterans Affairs and designed for eligible members of the military community and their spouses. Uniquely, this type of loan does not require a down payment. Additionally, the VA does not set credit score requirements; however, most lenders will still require a minimum 620 credit score.

5. USDA Loan

Minimum credit score required: None officially, though most lenders prefer 640.

A USDA loan is insured by the U.S. Department of Agriculture and meant for low- to moderate-income homebuyers. Similar to a VA loan, the USDA does not require a down payment and does not set a minimum credit score requirement. However, most lenders will require borrowers to have a 640 or greater credit score.

Improve Your Credit Score Before You Buy a House

Having the strongest credit profile and highest possible score places borrowers in the best position when considering a mortgage, regardless of which loan program or lender you use. While accessing, reviewing and possibly correcting credit reports are essential actions to take before applying for a mortgage, leaning on a credit score monitoring tool like SmartCredit can also provide insights as to how scores can change given certain behaviors. Sign up for a free trial today.

Sources:

CNBC.com – What Credit Score Is Required To Buy a House?
Experian – What Is Private Mortgage Insurance?