If you want to become a homeowner, read more on what credit score you need to buy a house before you submit your application for a mortgage. It’s the American dream-owning your own home. Now that you’ve got a good job, some savings, and find yourself real estate shopping online, you’re ready for the next step-finding a mortgage to finance your home purchase.
Getting a mortgage loan is the scariest part of buying a home for most people–there’s a perfect stranger digging into every detail of your financial life-and the fear that they can’t qualify for a mortgage loan stops many potential buyers from even trying. So educate yourself on how mortgages work, and the correlation between that all-important credit score and the interest rates you’ll be offered to understand what credit score you need to buy a house.
A Quick Guide To Credit Scoring
Not so long ago, your credit score was some mythical number known only to your creditors. There were the three main credit bureaus–Experian, Equifax, and TransUnion. Banks, car dealerships, credit and store cards, collection agencies, and local governments reported all your financial data—credit usage, collections, liens, and judgments–to these agencies on a monthly basis. In turn, these agencies used the FICO (Fair Isaac Company) algorithm to determine your credit score. Even now, the three primary bureaus still rely on FICO for scoring.
Knowing and understanding your credit score has gotten a lot more complicated, even as you have greater access to your credit history and score. There are several apps that give you access to your credit history and score, but beware–these apps use an algorithm called Vantage, and scores are generally 5-20 points higher than they are with the traditional FICO scoring that lenders use.
If you use Smart Credit or another app to keep track of your credit that’s fine, but that score will not match up to a FICO score, and could be heartbreaking if you think you can qualify for a mortgage with a 640 Vantage score.
Mortgage Rates and Credit Scores
So, what credit score do you need to buy a house then? Here’s the good news–you can actually qualify for a mortgage loan with a credit score as low as 500. And there is more good news–mortgage rates, in general, are not tied to your credit score. There’s a baseline rate, and you don’t get rewarded for a great credit score with a lower rate. You don’t get penalized, either–your lender will require a bigger down payment to offset a bad credit score–if your FICO is 640 you’ll have a hard time getting 97% financing. Your rate, then, is predicated on your down payment more than your credit score, but the required down payment is related to that score.
A Mortgage Is A Secured Loan
When you buy a car with not-great credit, you pay a higher interest rate than you would if you had a high score–the difference can be over 15% in APR. Even though the lender has the car title as security, it’s a depreciating asset and a higher risk. A house, on the other hand, is seen as an appreciating asset–real estate tends to be worth more as time goes by. Lenders look at the worst-case scenario–if they have to take back their collateral, will they lose money? With a car, the answer is usually yes. With a house, it’s no–they bake the risk into the interest rate and the down payment, and are sure they will make money either way.
Mortgages That Match Your Credit Score
A fixed-rate loan is generally your best bet, especially in this current low rate environment. Your payment is pre-determined for the life of the loan, so there won’t be any unpleasant surprises if rates rise. An adjustable-rate mortgage is only beneficial if you don’t think you will be in the home for more than five years and will sell before the rate adjusts. As low as rates are now, that chances you’ll have a lower payment after your rate adjusts is pretty slim.
Mortgage rates change daily, but they are historically low–under 5%.
Conventional–credit scores over 700–get you low rates, and a faster approval, or underwriting, process. The bigger your down payment, the lower your rate. The most you can borrow with a conventional loan is $484,000.
FHA–credit score as low as 500, rates are a bit lower than conventional, but underwriting takes longer and is more detailed. FHA loan limits are determined on a county-by-county basis throughout the country.
Traditional FHA loans require a 580 FICO–this gets you a down payment of as little as 3.5%, and some of that money can be a gift. If your score is 500, your down payment must be 10%.
VA–if you’re an honorably discharged veteran or active in the military, you are eligible for VA financing. Interest rates on VA loans are comparable to others, but you can qualify for 100% financing and more generous loan terms.
It’s smart to find a lender you trust and get pre-qualified for a mortgage before you start house hunting. If you need a few months to boost your credit score before you can qualify, you’ll have a road map to get you there. If you can qualify, get a pre-approval letter from the lender to take to your realtor–this is how they know you are a serious buyer in a tight market.