If you’re looking into buying a house, but your credit is poor.
The first thing you need to do is to check your credit score.
So what credit score is needed to buy a house?
In this article, we will cover the minimum credit scores needed for different types of mortgages.
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FHA Credit Score Requirements
Your credit score is the most important factor in determining if you qualify for a loan. The minimum credit score required will depend on the lender and the type of home loan you qualify for. Lenders set their own credit requirements, so the minimum score needed will vary. Below is the typical minimum credit score by loan type.
Typical minimum FICO scores by mortgage type:
- FHA Loan – 580+ credit score (500-579 score is possible but unlikely)
- VA Loan – 620+ credit score (some lenders require 580)
- USDA Loan – 640+ credit score
- FHA 203K Loan – 620+ credit score
- Conventional Loan – 620+ credit score
Minimum Credit Score Required for a Mortgage Loan
FHA loans have the lowest credit requirements of any mortgage, often referred to as bad credit home loans. In order for the FHA to insure a mortgage loan, the borrower must have at least a 500 credit score with a 10% down payment.
However, getting approved for an FHA home loan with a credit score in the 500-579 range is very difficult, even with 10% or more down. It’s highly recommended you follow the advice in this article to improve your credit before applying for a mortgage.
If you have a 580 or higher FICO score, you will just need a 3.5% down payment. Getting approved for an FHA mortgage with a 580+ score is much more likely than if your score was below 580.
Check your Scores for Free
The first thing you need to do before applying for a mortgage loan is to check your FICO score. There are a few reputable websites that give you all three credit reports and scores absolutely free.
These companies even have an app that will alert you when something on your credit profile changes.
What is an FHA loan?
FHA home loans are backed by the Federal Housing Administration. The FHA does not issue home loans. They insure them in case the borrower defaults on the loan. This reduces the risk for the lender allowing them to reduce the credit score needed to buy a house.
The Federal Housing Administration will back a loan if the borrower has at least a 500 credit score and a 10% down payment. However, it is extremely rare to get approved for an FHA loan with a credit score below 580.
Lenders look at more than just your credit score
Mortgage lenders are becoming better at finding out about the borrowers’ ability to repay a mortgage because just seeing if you have a good credit score.
One thing that will help you is if you can show that you have re-established credit, and there was an economic event that caused the bad credit, and you have since recovered from the financial hardship.
Lenders will also look at your debt. If you don’t owe very much, this is a strong compensating factor for poor credit. Compensating factors are factors that reduce the lender’s risk, allowing them to approve borrowers with low credit scores.
Mortgage companies will also want to see recent solid payment history with no late payments or collection accounts in the past 12 months: a low debt-to-income ratio and stable employment history.
Compensating Factors for Bad Credit
- Low loan-to-value ratio (High down payment 10%+)
- A few months of cash reserves
- High income
- Low debt-to-income ratio
- Long employment history with current employer
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Credit Score Ranges
There are three major credit reporting agencies in the U.S. TransUnion, Experian, and Equifax. All three bureaus grade your credit history on a range from 350-850.
Your score will be different from each credit bureau because not all creditors will report to all three companies.
A 700 credit score is generally considered good by many lending institutions. A poor score is considered any credit score below 620.
Credit Score Range
- 500-579 = Bad credit score
- 580-619 = Poor credit score
- 620-679 = Fair credit score
- 680-739 = Average credit score
- 740 and higher = Great credit score
Your credit score will affect your interest rate
Homebuyers often ask, what is a good credit score to buy a house? Well, just having a good enough score to get approved for a home loan does not mean you’re going to get a great deal.
Your credit score will affect the interest rate you get. Poor credit scores often lead to higher mortgage rates and increased closing costs, leading to a higher monthly payment. Obviously, the higher your credit score, the lower your rate will be.
- 579 and lower – If you are approved for a mortgage with this low of a score, you will have a credit score as much as 2% higher than the current lowest rate.
- 580-619 – You can expect an interest rate as much as 1% higher than the lowest rates available.
- 620-679 – With a credit score in this range, your interest rate will be slightly affected. Rates could be .5% higher than someone with great credit will receive.
- 680-739 – This is the range most homebuyers are at, your rate will not be affected much at all in this range.
- 740 and higher – You will be offered the best rates mortgage companies have to offer.
Tips to increase your credit score quickly
Pay down your credit card balances
Your credit utilization ratio is the percentage of credit you are using on your credit card accounts. Credit utilization ratios account for 30% of your credit score.
The higher the balance you have on your credit cards, the lower your credit score will be. Make sure to pay your credit card balances as low as possible before applying for a mortgage
“Pay for Delete”
Of you have any collections on your credit report, they are obviously having a significant negative impact on your credit score. You can contact the collection agencies directly and ask them if they will do a pay for delete.
A pay for delete is an agreement that you agree to pay the balance, and in return, the creditor agrees to remove the account from your credit report. If a creditor will not agree to this, there is no reason to pay off collections unless your lender tells you to. Paying collection accounts does not improve your credit score.
Become an Authorized User
If you have a family member or close friend with a credit card. They can add you as an authorized user on their account. The entire credit history of the account will be added to your credit report.
FICO does consider authorized user accounts into their credit scoring algorithm. This is a quick way to add up to 30 points to your FICO score.
What credit score do you need to purchase a home?
FHA loans require 500 FICO score with 10% down and at least a 580 credit score with 3.5% down.
How can I get a house with low credit scores?
Depending on how bad your credit is, you just need a 580 credit score to buy a house. Credit scores between 580-620 are often considered poor, but it may be enough for you to get approved.
Do FHA home loans only come with a fixed-rate mortgage?
FHA loans come with a fixed-rate or an adjustable-rate. However, the most common mortgage terms for an FHA mortgage is a 15 year or a 30 year fixed rate.
Are FHA mortgages for first-time homebuyers only?
No. While FHA loans are great for first-time buyers, they are open for all homebuyers. FHA financing is available to all home buyers looking to purchase a house as their primary residence. Investment properties do not qualify.
There is no limit to how many times you can get an FHA home loan. You must sell your house if it has an FHA loan on it before you can apply for another FHA mortgage.
How can I increase my credit score so I can get a home loan?
To improve your credit score quickly, you can pay the balances on your credit cards as low as possible. The lower your credit card balances are, the higher your credit score will be.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.