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The credit score needed to buy a house depends on the type of mortgage loan you're applying for and your lender. While it's possible to get a mortgage loan with bad credit, you typically need good or exceptional credit to qualify for the best terms.
Read on to learn what credit score you'll need to buy a house and how to improve your credit leading up to a mortgage application.
What Is the Minimum Credit Score to Get a Mortgage?
Several different types of mortgage loans exist, and each one has its own minimum credit score requirement. Even so, some lenders may have stricter criteria in addition to credit score they use to determine your creditworthiness.
Here's what to expect based on the type of loan you're applying for:
- Conventional loans: These loans aren't insured by a government agency and conform to certain standards set by the government-sponsored entities Fannie Mae and Freddie Mac. Conventional loans typically require a minimum credit score of 620, though some may require a score of 660 or higher.
- Jumbo loans: A type of non-conforming mortgage loan, jumbo loans carry higher loan amounts than conventional loans. Because there's more risk involved with bigger loans, jumbo loans may require a credit score of 700 or higher.
- FHA loans: Insured by the Federal Housing Administration, FHA loans have a minimum credit score of 500 if you make a 10% down payment, or 580 if you put down 3.5%.
- VA loans: These loans are insured by the U.S. Department of Veterans Affairs and were created for select members of the military community, their spouses and other eligible beneficiaries. VA loans don't have a minimum credit score requirement, but lenders that offer these loans typically require that you have a score of 620 or higher.
- USDA loans: Insured by the U.S. Department of Agriculture, USDA loans are meant for low- and moderate-income homebuyers looking to purchase a home in rural areas. The USDA has a minimum credit score of 580 for its loans, but there's flexibility to go lower in certain situations.
If your credit score is in great shape, you may have several different loan types from which to choose. But if your credit score is considered bad or fair, your options may be limited.
How Your Credit Score Affects Mortgage Rates
Your credit score plays a role in determining the interest rate and payment terms on a mortgage loan. That's because lenders use what's called a risk-based pricing model to determine loan terms.
The more likely you are to pay your bills on time, based on your credit history, the lower your interest rate may be. With a less-than-stellar credit score, however, you may end up paying more.
For example, let's say you're hoping to get a mortgage loan for $250,000 over 30 years. If you have great credit and qualify for a 4% interest rate, your monthly payment would be $1,371 (excluding property taxes, homeowners insurance and private mortgage insurance), and you'd pay a total of $243,560 in interest over the life of the loan.
But if your credit needs some work and you qualify for a 5% interest rate instead, that increases your monthly payment to $1,446 and your total interest burden to $270,560—a difference of $27,000.
Mortgage lenders don't just look at your credit score when determining your rate, though. They'll also consider your debt-to-income ratio (DTI)—how much of your gross monthly income goes toward debt payments—as well as your down payment and available savings and investments.
So while it's important to work on your credit score before you apply for a mortgage, avoid neglecting these other important areas of your financial situation.
Can You Get a Mortgage With a Bad Credit Score?
It's possible to get approved for a mortgage with poor credit. But just because you can, it doesn't necessarily mean you should. As previously discussed, even a small increase in your interest rate can cost you tens of thousands of dollars over the length of a mortgage loan.
If you're planning on buying a home and you have bad credit, here are a few tips that can help you potentially score a decent interest rate:
- Consider applying for an FHA loan, which you can get with a credit score as low as 500—though to get approved with a score below 580, you'll need a 10% down payment.
- Make sure you have a large down payment, plus a good amount of cash reserves beyond that.
- Work on paying down other debts to reduce your DTI.
- Consider asking someone with good or exceptional credit to apply with you as a cosigner.
There's no guarantee that these actions will help you qualify for a mortgage loan with good terms, but they can improve your odds.
How to Prepare Your Credit for a Mortgage
If you're thinking about buying a home soon, it may be worth spending some time getting your credit ready before you officially begin the process. Here are actions you can start taking now, some of which can improve your credit score relatively quickly.
Check Your Credit Score and Reports
Knowing where you stand is the first step to preparing your credit for a mortgage loan. You can check your credit score with Experian for free, and if it's already in the 700s or higher, you may not need to make many changes before you apply for a preapproval.
But if your credit score is low enough that you risk getting approved with unfavorable terms or denied altogether, you'll be better off waiting until you can make some improvements.
Whether or not your credit is ready for a mortgage, get a copy of your credit reports to check for potential problems or concerns. You can get a free copy of your credit report every 30 days from Experian or from each of the three national credit reporting agencies every 12 months at AnnualCreditReport.com.
Once you have your reports, read through them and watch for items you don't recognize or are outright inaccurate or fraudulent. If you find any inaccuracies, you can dispute them with the credit reporting agencies. This process can take time, but it can also improve your score quickly if it results in a negative item being removed.
Pay Down Debt
Paying off other debts can not only lower your debt-to-income ratio, but it can also help improve your credit score. That's especially the case if you have credit card debt.
Your credit utilization rate—how much credit card debt you have in relation to your total available credit—is an important factor in your credit score. While many credit experts recommend having a credit utilization of 30% or less, there is no hard-and-fast rule—the lower, the better.
Because your credit utilization rate is calculated each month when your credit card balances get reported to the credit bureaus, your credit score could respond quickly if you pay down high credit card balances.
Avoid Applying for New Credit
Virtually every time you apply for credit, the lender runs a hard inquiry on your credit report. In most cases, you'll see your credit score drop by five points or fewer with one inquiry, if at all. But if you have multiple inquiries in a short period, it could have a compounding effect and lower your credit score even more.
Also, adding new credit increases your DTI, which is a crucial factor for mortgage lenders.
If your credit report includes some significant negative items, such as a bankruptcy, collection account or repossession, it may take more time for your credit score to recover than from high credit card balances or one late payment.
While it may not be ideal to wait to buy a home, taking some time to allow your credit history to get back on track could save you a lot of money. It can also allow you to build up a more substantial down payment, which will likely boost your approval odds.
Think About More Than Just the Loan Terms
A mortgage is a long-term financial commitment. But getting into a home with less-than-perfect terms now can still make sense in certain situations.
If you live in an area where a mortgage payment would be cheaper than what you pay in rent, for example, even a loan with a slightly higher interest could save you money in the short term. And if owning your own home improves your overall quality of life, that could be worth paying a little more.
And remember, you're not stuck with your first 30-year mortgage. As you continue to work on improving your credit, you may be able to refinance your loan down the road and get the better terms you're seeking.
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