If you’re looking into buying a house but your credit is poor. The first thing you need to do is check your credit score. So what credit score is needed to buy a house? The answer is, it varies. FHA has a minimum credit score requirement of 500 with a 10% downpayment. However, it is very difficult to get approved for a mortgage with a score below 580.
Your credit score is the first thing a mortgage lender will check when seeing if you qualify for a loan. While there are many factors involved in qualifying for a loan, your credit score is the most important. The minimum credit score you need to purchase a home will depend on the type of home loan you qualify for.
In this article we will cover the minimum credit scores needed for different types of mortgages. We will also go over some things you can do now to increase your credit score.
Typical minimum credit scores by loan type:
- FHA Loans – 580+ credit score (500-579 score is possible but unlikely)
- VA Loans – 620+ credit score (some lenders require 580)
- USDA Loans – 640+ credit score
- FHA 203K Loans – 620+ credit score
- Conventional Loans – 620+ credit score
Credit score needed to buy a house in 2017
Before the 2007-2008 housing market crash, it was much easier for people with poor credit to find subprime loans. Lenders were not as heavily regulated as they are today. In 2010, Obama signed the Dodd-Frank Wall Street reform into law. This law tighten up the requirements in the mortgage industry and made it more difficult to qualify for a loan. Especially people with low credit scores.
What is considered a low credit score
There are three major credit reporting agencies in the U.S. TransUnion, Experian and Equifax. All three bureaus grade your credit score 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. Poor credit scores are generally any score below 620.
- 500-579 = Bad credit
- 580-619 = Poor credit
- 620-679 = Fair credit
- 680-739 = Good credit
- 740 and higher = Great credit
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 accounts. Credit utilization ratios account for 30% of your credit score. The higher 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 account 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 is an FHA loan?
FHA loans are backed by the Federal Housing Administration. The FHA does not issue the 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 very rare to get approved for an FHA loan with a credit score below 580.
Your credit score will affect your interest rate
Your credit score will affect the interest rate you get. Obviously the higher your credit score the lower you 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.
What credit score do you need to purchase a home?
FHA loans require at least a 580 credit score to buy a house.
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.
Are FHA loans a fixed rate?
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 loans for first-time home buyers only?
No. FHA loans are for anyone purchase a house as their primary residence. There is no limit to how many times you can get an FHA loan. You will to sell your house if it has an FHA loan on it before you can apply for another FHA loan.
How can I increase my credit score so I can get a mortgage?
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.