Key Takeaways:
- A good credit score, according to the VantageScore® 3.0 model, falls within the range of 661 to 780, while an excellent score ranges from 781 to 850
- Not all lenders use the same credit scoring model when assessing your credit worthiness.
- The credit score you need to be approved for a mortgage may vary between lenders.
- Your credit score is just one factor lenders may consider when you apply for a loan.
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For many, a home is the biggest purchase they’ll ever make. Buying a home can also be a lot of work. Knowing the state of your credit health can help ease the stress of such a major financial decision. Shopping for a home, applying for loans and waiting for approval takes time, and you may not be eligible for a loan depending on your credit health.
So, what credit score is needed to buy a house? And what’s the solution if your credit score isn’t where you want it to be? Below, we’ll discuss the credit score you may need to get a mortgage and what you can do to prepare your credit before you begin shopping for loans.
Credit score for a mortgage
Lenders will have different requirements, but generally speaking, the higher your score, the more likely it is you’ll be approved for a mortgage and secure better terms, like a lower interest rate. An excellent credit score is within the range of 781 – 850 based on the VantageScore® 3.0 scoring model. A good credit score is within the range of 661 – 780. Though, this doesn’t mean you won’t be able to get a mortgage if your credit score isn’t considered good or excellent. Because there are different scoring companies and they have different models, the range of good credit scores can vary.
Popular advice is to have at least a credit score of 620 to be approved for a conventional mortgage. However, if you have a lower score, you may qualify for government-backed loans from the Federal Housing Administration (FHA loans), U.S. Department of Veterans Affairs (VA loans) or the United States Department of Agriculture (USDA loans).
These loans have different credit score and down payment requirements than conventional loans and may be worth considering, depending on your financial situation and eligibility. Your loan officer or mortgage broker can provide specific guidance based on the credit score model they are using to evaluate your creditworthiness.
How does my credit score affect my mortgage?
When you’re applying for a mortgage, your mortgage lender will look at your credit score, among other financial factors, to assess your risk as a borrower. People with lower credit scores may have negative items on their credit report, like multiple late payments or high credit utilization. A lower credit score can also be a sign that you have a short or limited credit history, so lenders may have trouble accurately determining your creditworthiness.
If you have a lower credit score, you may have a tough time getting approved for a loan, which can lengthen the home-buying process. And if you can secure a loan, you may have to pay a higher interest rate.
Even a small increase in your mortgage interest rate can have a significant impact on the total cost of your home. You can use a mortgage calculator to see the difference in monthly payment changes and the total cost of the home.
For instance, for a $300,000 home with a 30-year mortgage at a fixed rate of 5% and a 20% down payment ($60,000) you’ll pay about $223,814 in interest throughout the life of the loan. For the same $300,000 home and 30-year mortgage, but with a rate of 4%, you’d pay $172,487 in interest. For this example, one percentage point in interest can save a homebuyer over $51,000 over the life of the loan.
This is why it’s important to shop for loans and do your best to prepare your credit well ahead of the home-buying process.
How to improve your credit health to buy a house
Practicing healthy credit habits before buying a home may help you secure a mortgage with favorable loan terms. This can make your dream home more affordable. But just as important, you’ll go into the process with confidence in your credit and financial standing.
1. Review your credit report
Your credit report is part of the financial story you’re telling banks and lenders. Your report is provided to lenders and the information within is what determines your credit score. Make sure the information in your report is a true reflection of your history with credit. You can get free access to your credit reports weekly at annualcreditreport.com. Know that reading your own credit report will not impact your credit score.
Read through your reports thoroughly and be sure you recognize the accounts and account activity and confirm the accuracy of the personal information. If you find something you believe to be inaccurate on your TransUnion® credit report, you can dispute it online through the TransUnion Service Center. If you find inaccuracies on your credit reports with other credit bureaus, you will need to submit a dispute with each credit bureau individually.
It’s helpful to remember that your credit report may not reflect the most recent activity on your account, as lenders tend to update account information monthly. You may not need to submit a dispute — it may just need some time to update on your report. For instance, if you made a payment recently, it may not show up in your credit report immediately but will likely be reflected when the lender provides their next update.
2. Make your payments on time
Your payment history is the most influential credit score factor. Lenders want to know you’re good at paying your debt back on time. Missing a payment can have a negative impact on your credit score and an unfavorable payment history can make it harder to be approved for a mortgage.
3. Pay down as much debt as you can
Your credit utilization is an important aspect of your credit score calculation. Paying down credit card balances and other debt, if you have it, will help you demonstrate a healthier picture of credit worthiness before applying for a mortgage.
4. Avoid hard inquiries
You may be instructed by your home-buying team to not apply for new credit as you head toward closing on your house — it’s for a good reason. Your mortgage application represents your finances in their current state — the combination of all your assets and debt. Applying for a new loan could signal a change in your financial status and could give your lenders pause about your ability to make payments on the original mortgage offer.
Applying for new credit can temporarily lower your credit score. A hard inquiry may appear on your credit report when a lender accessed your credit report in connection with an application for credit. Typically, you’ll see hard inquiries on your report after applying for traditional credit products like credit cards, mortgages and auto loans.
Since your credit score can be a factor to determine your mortgage interest rate, it’s best to wait to apply for a new credit card or loan if you can as you prepare your credit to apply for a mortgage. As we saw earlier, even a minor change in the interest rate can cost you thousands over the lifetime of the mortgage.
Pro Tip:
Your loan officer or mortgage broker may ask questions about debt you have, especially if it’s recent. Read through your credit reports to be sure you recognize all your accounts and be prepared to discuss any recent hard inquiries. Hard inquiries aren’t deal breakers, but they will want to understand any reasons for recently acquired debt to assess your creditworthiness.
Other mortgage approval factors
In addition to your credit score, there are some other factors that can impact your ability to qualify for a mortgage:
- Debt-to-income ratio (DTI): Your DTI ratio compares the monthly debt payments you owe to your monthly income — a lower DTI ratio can show you have enough room in your budget to handle a mortgage payment.
- Employment and income verification: Before approving your loan application, your lender will want to verify that you’re employed and bringing in steady income.
- Down payment requirements: Depending on the mortgage type you qualify for, you may have to pay between 3% and 20% in the form of a down payment. There are some assistance program loans that don’t require a down payment. Note that if you buy a home with a downpayment of under 20% you may be required to pay Private Mortgage Insurance.
Know what you can afford
Your bank may approve you for a certain loan amount, but don’t feel pressure to borrow up to that number. It’s important to have a budget ahead of time and stick to it. If your mortgage payment is too high, it may make it harder to keep up with other bills and obligations, which can impact your credit health.
Some people like to harp on the perils of $5 lattes and other “unnecessary” daily spending habits. But getting the big purchases right, like home buying, can be far more impactful to your financial health in the long term. Spending over your budget for a home is one financial decision that could cost an additional tens of thousands of dollars, plus interest — that’s a lot of lattes.
Does getting preapproved for a mortgage hurt your credit?
If you get preapproved for a mortgage, it may have an impact on your credit score because, depending on the lender providing the preapproval, it may appear as a hard inquiry on your credit report. Typically, preapprovals require you to submit documentation validating your current financial status so lenders can offer a commitment to fund the loan with specific terms. With a preapproval, you can feel confident as you shop for your home since you’ll know how much you are able to borrow and at what interest rate
A preapproval is different from a prequalification. With a prequalification, you’re usually self-reporting information and a lender does not require you to submit any documentation for official underwriting. In many cases, a prequalification may require a credit check, but it typically appears as a soft inquiry on your credit report. Soft inquiries do not impact your credit score. Always read the terms and conditions before applying to be sure you understand any potential inquiry and credit implications.
Know your numbers and ask questions
Your credit score isn’t the only factor a lender will look at to determine whether you are credit worthy. They may also request a bevy of financial information, which includes, but isn’t limited to, your income, statements of financial accounts, your current loans and more. Before you begin submitting loan applications, you may want to start making a list of all your accounts, like any checking, savings and brokerage accounts, so you’re prepared when lenders request official documentation.
Make sure to maintain consistent communication with your home-buying team throughout the process. This team can include your real estate agent, your loan officer or mortgage broker and a real estate attorney, among other professionals. They’ll be able to help guide you through the process and answer questions specific to your needs. You want to make sure, every step of the way, that you feel confident and comfortable with your decision since this is such an important purchase.
FAQs
Why is my credit score important when applying for a mortgage? Your credit score is a snapshot of your creditworthiness and helps lenders assess the risk of lending you money. A higher credit score may help you secure better interest rates and more favorable loan terms.
What steps can I take to improve my credit health? For healthy credit as you prepare to buy a home, make sure to pay bills on time, reduce debt if you can and avoid new credit inquiries.
How often should I check my credit report and score? It can be good practice to check your credit score regularly, perhaps monthly or quarterly. You can obtain a free copy of your credit report from annualcreditreport.com.
Does applying for a mortgage affect my credit score? Yes, applying for a mortgage can affect your credit score because the process may result in a hard inquiry on your credit report. Hard inquiries can have a negative impact on your credit score, but multiple inquiries within a short period for the same product type, like a mortgage, are usually treated as a single inquiry.
Are there any programs for first-time homebuyers with low credit scores? Yes. Programs like FHA loans and some state-specific first-time homebuyer programs are designed to help individuals with lower credit scores purchase a home.
