Purchasing a home is an exciting life event that millions of individuals and families undertake each year. As you begin evaluating your options on the path to home ownership, one of the first factors to consider is your credit score. If you have a high credit score, you’ll qualify for more loan options and lower interest rates — but even if your score is on the lower end, there’s still a variety of home loan options available to you. Read on to learn more about how your credit score impacts the home purchase process and what credit scores are recommended for homebuying.
What credit score is needed to buy a house?
Credit scores range from 0 to 850 and fall into brackets ranging from poor to excellent. Here’s the current breakdown of how FICO categorizes each credit score range:
- Poor: Below 580
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: Above 800
Borrowers with scores above 740 have the best odds of getting a low interest rate and good terms on their home loans. Those with fair to poor credit scores will have a harder time qualifying for a mortgage — if approved, they’re not likely to get the lowest rates available. There are still plenty of paths to home ownership, however. Those with lower scores might qualify for FHA, Fannie Mae, Freddie Mac, USDA and VA loans. These are government-backed loans that take the financial risk off the lender and make it more likely for high-risk borrowers to get approval.
What is the minimum credit score to buy a house?
Different loan types carry different requirements, but credit score minimums for home loans typically range from 500 to 620. Here are the credit score requirements for the most common home loans:
- Conventional: 620
- FHA: 500 to 580
- VA: Varies by lender; typically low- to mid-600s
- USDA: Varies by lender; typically around 580
You can find mortgage lenders near you and submit a prequalification request for more information about minimum score requirements. If you have a very low credit score, you might have a better chance of qualifying if you’re able to offer a higher down payment (typically around 10% or more of the home’s purchase price).
How does credit score affect mortgage rates?
Your credit score affects more than just your application approval. It also determines the interest rate attached to your home loan. The higher your credit score, the lower the interest rate. Interest rates vary depending on the housing market and other factors, but at the time of publishing, the average interest rate is below 3% for borrowers with a credit score above 700 and as high as 4.3% for those with scores below 640.
While this difference might seem minor, it can add up to significantly higher costs in your monthly mortgage payment and over the life of the loan. For example, on a 30-year mortgage of $285,000, the difference between an interest rate of 3% and 4.3% is $208 per month. This amounts to nearly $75,00 over the life of the loan.
If your credit score is on the lower end of the spectrum, it’s wise to take steps to improve your score before applying for a loan. This will unlock better interest rates and keep your costs as low as possible.
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