Key Takeaways for Home Buyers

Understanding your credit score is crucial when applying for a mortgage loan. Different loan types have varying minimum credit score requirements, and typically, higher credit scores qualify for lower interest rates. While your credit score may not matter if you’re paying cash for a home, it becomes essential if you need financing. It affects not only your eligibility for the mortgage but also the terms and interest rates you receive.

Minimum Credit Scores by Mortgage Type

Different loans have specific minimum credit score requirements. Here's a breakdown of what you need to qualify for various types of mortgages:

• Conventional Loans: Minimum 620

• FHA Loans: Minimum 500 (with 10% down); 580 (with 3.5% down)

• USDA Loans: Minimum 640

• VA Loans: No official minimum, but lenders typically require 620

• Jumbo Loans: Minimum 700

What Is a Good Credit Score for Buying a House?

Credit scores are typically evaluated using the FICO model, ranging from 300 to 850:

• 800 or higher: Exceptional

• 740-799: Very good

• 670-739: Good

• 580-669: Fair

• 579 or lower: Poor

How Your Credit Score Affects Your Mortgage Rate

A higher credit score generally results in lower mortgage rates. Even a small difference in your score can significantly impact your monthly payments and the total interest paid over the life of the loan. For example, on a $300,000 mortgage, a difference between a 7% and a 6.5% interest rate could mean an extra $35,000 over 30 years.

Here's a snapshot of current rates based on credit score ranges (as of January 2024):

Fico Score APR Monthly Payment Total Interest Paid

760-850 6.38% $1,873 $374,133

700-759 6.60% $1,916 $389,894

680-699 6.78% $1,952 $402,569

660-679 6.99% $1,994 $418,019

640-659 7.42% $2,082 $449,465

620-639 7.97% $2,195 $490,133

Why Your Credit Score Matters to Lenders

Your credit score helps lenders determine your risk as a borrower. It also affects your debt-to-income ratio (DTI), which is the percentage of your monthly debt payments relative to your income. Ideally, your DTI should be below 36%, though some lenders accept higher ratios with larger down payments.

Can You Get a Mortgage with a Low Credit Score?

Yes, you can get a mortgage with a low credit score, but expect higher interest rates and stricter financial scrutiny. Different lenders have varying requirements, so it’s wise to shop around.

How to Improve Your Credit Score to Buy a House

If your credit score isn’t great, here are some tips to boost it before applying for a mortgage:

• Check Your Credit Report and Correct Errors: Request your credit reports from Experian, Equifax, and TransUnion. Dispute any inaccuracies.

• Pay Down Credit Card Balances: Aim for a credit utilization ratio of 30% or less.

• Pay All Bills on Time: Payment history is a significant factor in your credit score.

• Don’t Close Older Credit Lines: Keep older accounts open to maintain a lower credit utilization ratio.

• Avoid Opening New Credit Lines or Taking Out Large Loans: Each new credit inquiry can slightly lower your score.

By following these steps and maintaining good financial habits, you can improve your credit score and enhance your chances of securing a favorable mortgage.

Learn More: Understand the elements that impact your credit scores.