This Is the Credit Score You Need to Buy a HouseLearn how to get the best mortgage rates available for your credit score.

 

Switching from renting to owning a home requires planning and a credit history. If you’re considering applying for a mortgage loan, check your credit score first. Your score affects your ability to get a mortgage as well as a good interest rate. It is possible to qualify for a mortgage even with a poor credit score, but good credit scores of 670 or higher are more commonly approved by lenders, and very good to exceptional credit scores above 800 are the most attractive to lenders.

Mortgage lenders use several factors to determine who they give loans to, but the credit score is a primary consideration. Knowing what you and your score look like to a lender helps you understand what you could qualify for before you start the application process. To get the best interest rate on a home loan, improve your credit score before you apply.

Why Mortgage Lenders Look at Credit Scores

Credit scores show a borrower’s ability to pay off debt. If a prospective borrower has a high credit score, it can indicate he is reliable and disciplined financially, which means he’s unlikely to miss a mortgage payment. Mortgage lending is a risky business, and lenders want to make sure the borrower is able to pay the loan back.

Mortgage lenders also want to make money and minimize losses. If you have a low credit score, that could indicate you’re a risky borrower. As a result, a lender might not approve you for a loan or might give you a loan with a higher interest rate.

Is My Credit Score Good Enough to Buy a House?

To help you gauge where you stand, review the FICO credit score scale. It ranges from exceptional to poor — if your credit score is poor, you need to take steps to improve your credit before you start the process of buying a home.

Credit RatingFICO Score Ranges
Exceptional800 and above
Very good740-749
Good670-739
Fair580-669
Poor579 and below

Many lenders use the FICO score model to decide whether to grant homebuyers mortgages. Typically, the lower your credit score, the higher your mortgage costs will be. Although you could qualify for an FHA loan with a credit score as low as 580, your interest rate will likely be higher than a borrower with a credit score of 700 or more.

Each lender uses different criteria to approve a mortgage loan. In addition to your credit score, lenders will consider factors such as your income, debt-to-income ratio and debt-to-loan ratio when deciding whether to approve your home loan application.

Find Out: 10 Worst States to Get a Mortgage Loan

Exceptional Credit

With a credit score of 800 and above, you can get approved for a mortgage loan more easily. Approval is not, however, guaranteed.

An exceptional credit score is important to lenders, but you still might not get the best interest rate on the loan because of other factors. Calculating your debt-to-income ratio has a lot to do with the lender’s overall decision. For example, if you have an exceptional credit score but a high debt-to-income ratio, you might get denied.

In most cases, a 43 percent debt-to-income ratio is the highest you can have to qualify for a mortgage. Make sure that your exceptional credit score is coupled with a low debt-to-income ratio to improve your chances of getting a mortgage loan with a lower interest rate. In addition, shop around and find the best mortgage lender — if your credit score is exceptional, you will be more attractive to lenders, giving you the luxury of selecting from several mortgage choices.

Very Good Credit

If your credit score is somewhere between 740 and 749, you have very good credit. Chances are high that you’ll qualify for the mortgage loan you want with a fair interest rate. Like borrowers with exceptional credit, however, you’ll need to have more than a very good credit score to get the best deal on your interest rate, mortgage fees and other considerations.

Read: 15 Surprising Reasons Your Mortgage Loan Could Be Rejected

Good Credit

If your score is between 670 and 739, you have good credit, so you can likely qualify for a home loan, but probably won’t qualify for a mortgage with an excellent interest rate. As long as your debt-to-income ratio is low, however, and you have a larger equity position — meaning you can afford a larger down payment — you stand a good chance of getting approved for a loan with a decent interest rate.

Fair Credit

If your score is between 580 and 669, you have fair credit, which means you could have a tougher time getting approved for home loans with lower interest rates. Consider applying for an FHA loan, which is available to those within this credit score range. FHA loans typically require you to make a 3 percent down payment, but if your score is lower than 580, you might have to make a 10 percent down payment.

Read: When to Choose an FHA Refinance Over a Conventional Mortgage

Poor Credit

You can still buy a home with bad credit, thanks to FHA loans and subprime mortgage loan lenders. A subprime mortgage is a type of loan for people with poor credit histories who can’t qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime lenders charge interest rates above the prime lending rate.

Comments
  • Reese

    It’s in my five year plan to buy a home. This list will come in handy.

  • Elyssa Kirkham

    I’d love to buy a home in the next few years. I’ll definitely be weighing between whether extra money would be better spent going towards savings for down payment or paying down existing debt (don’t have much, just some student loans with a rate comparable to current mortgage rates). Some good tips!

    • If your student loan accounts are in good standing and the payment is affordable, continue regular payments and put your extra funds toward the down payment and closing costs. Accounts in good standing remain on your credit report for ten years after the date of the last activity. And student loans add value to your credit mix. So there’s no distinct advantage to paying them off early, other than the obvious freedom from debt. A small disadvantage is that a mortgage partly depends on your debt to income ratio, so any outstanding debt will lower the total loan amount that you’ll qualify for.

      Mortgage terms, on the other hand, improve as the amount of available cash goes up. If you are fortunate enough to amass even more than the 20% required for the best rates, the extra money can go toward decorating and fixing up your new place or to lowering your loan amount and the resulting monthly payments.