Credit Score & Buying a House

A lot goes into buying that first home. After saving up, considering neighborhoods and looking online to narrow down your options, you may feel you’re ready to apply for lending. But, do you know what credit score is needed to buy a home?

Getting the details on your credit rating and knowing what to do to improve your credit score can really help to get your financing approved. If you’re a first-time home buyer, or if you’ve got a little work to do to boost your credit rating, you may not be sure about what impact your credit score has on a mortgage application.

Because your credit history plays such an important role when purchasing a home, we put together this review of how your credit rating impacts your ability to lock in affordable financing for the home of your dreams. With a little time and effort, you can increase your credit rating, land a mortgage and begin a new and exciting chapter in your life.

What Credit Score Do Mortgage Lenders Use?

Generally, lenders will offer their most competitive rates and lending packages to those with great credit, or a score above 760.

The three major credit bureaus — Equifax, Experian and TransUnion — all monitor your credit history independently. They each create a score of your “creditworthiness,” otherwise known as your FICO score. The name FICO is an acronym for “Fair Isaac Co.” It’s this score that’s used widely among lenders as the gold standard to determine lending risk. The higher the FICO score, the less potential risk a borrower poses to the lender. Typically, a FICO score is based on five main factors:

• Your payment history: 35 percent
• Your debts and outstanding balances: 30 percent
• The age of your credit history: 15 percent
• New credit applications and inquiries: 10 percent
• The mix and types of your credit accounts: 10 percent

Because your good credit rating is worth protecting, it’s important to have the right coverage to help you recover from identity theft as quickly and stress-free as possible — so you can stay on track and keep pursuing what’s important. American Family’s identity theft Protection and restoration insurance is great additional coverage that provides guidance through the resolution process, minimizing your stress, expenses and lost time. While you’re looking at managing your credit rating, now’s a great time to pick up this coverage.

So, what credit score do you need to buy a home? That answer depends on the mortgage lender. Some mortgage groups will agree to lend to borrowers with less-than-optimal credit. Others will only grant pre-approval or agree to lend to applicants with a moderate credit score.

You can request a free credit report once annually from each credit bureau. Look online for details on how to make an official request for yours. Additionally, you can boost your odds to qualify for a loan by actively monitoring your credit with our partner CyberScout. This wide-ranging service helps you prevent and recover from the unexpected — so you can focus on what matters most.

There are also a number of free services, like NerdWallet, Credit Karma or Credit.com that can assist you to better understand your credit status. These groups can help you with free, on-demand credit reports. You’ll also receive pointed advice on how to best improve bad credit quickly.

Some credit card companies also offer weekly or monthly credit monitoring for cardholders, so check with yours to see if you have that option.

What Is the Minimum Credit Score Needed to Buy a House?

Most lenders will only approve home loan applications when borrowers have a minimum credit score of at least 580. And that FICO score requirement can increase, depending on the type and terms of the loan. Here’s a list of typical minimum FICO scores by mortgage type:

• FHA loan: 580+ FICO score (lower scores are sometimes permitted with FHA mortgages)
• VA loan: 620+ FICO score
• USDA loan: 640+ FICO score
• FHA 203k: 620+ FICO score
• Conventional Loan: 620+ FICO score

Even if you need to improve your credit score before you apply for a mortgage, don’t let the minimum credit score for a home loan stop you. There are many simple ways to improve your credit score before you start applying.

How Do Credit Scores Affect the Home Buying Process?

Lenders will do their best to get a wide-angle view of your financial well-being before they agree to lend. Although your FICO score is central to landing a mortgage deal, it’s not the only factor that banks consider when making that decision. Does your credit score affect your mortgage rate? Yes it can, but other data plays a key role as well.

Here’s a list of other key indicators that mortgage brokers and direct lenders will use to determine loan eligibility:

• Your monthly budget and how much you’re spending on all other loans and credit card debt
• The size of your down payment
• The current interest rate
• The loan-to-value ratio of the down payment vs. the total loan amount
• The amount of money you have in savings
• Your income
• Your debt-to-income ratio
• Your employment history with current and past employers

As you can see, exactly how your credit score affects your mortgage rate depends on many independent variables. Your financial and professional history can impact the rate you’re offered from a lender. Poor credit scores can be met with higher interest rates and more cash due at closing, and a higher monthly payment is also likely when these key indicators are less than optimal.

With a little focus and hard work, you can lower your personal debt and improve your credit score. You’ll find a few minor adjustments in spending and saving can make a big difference. In time, the home of your dreams can be a lot closer than it once was. And with a good credit rating, you’ll find lenders are more willing to compete for your business — and that can save you thousands.

How Do I Navigate the Home Purchasing Process?

With so many variables in play when buying a home, it can be difficult to know where to begin. Our first-time home buyer’s guide is a great place to start. You’ll get step-by-step instructions on the entire process and insightful advice on how to handle your credit report that can make a big difference to your bottom line. From sourcing the right real estate agent to navigating your inspection report, we’ve got your back.

While you’re considering your mortgage application options, now’s a great time to reach out to your American Family Insurance agent (Opens in a new tab). Your lender will want proof of insurance for your home when the time comes to close on the house, and your agent can help you build a customized policy that fits the exact needs of that beautiful new home.