What credit score do you need to buy a house? Your guide to credit and mortgages

Gina Pogol
The Mortgage Reports contributor

What credit score do you need to buy a house?

You don’t need perfect or even good credit to buy a house. In fact, the minimum credit score to get a mortgage is 580 — which is considered only “fair.”

Remember, mortgage lenders don’t look at your credit score in a vacuum.

They also look at your credit report, debts, and down payment. The stronger you are in these areas, the more likely you are to get away with a low credit score.

The downside to lower credit is that you’ll pay a higher interest rate. But many buyers with low scores choose to buy now and refinance for a better rate when their credit improves later on.

Verify your home buying eligibility (Oct 27th, 2021)

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Minimum credit scores by mortgage program

The credit score needed to buy a house depends on the type of loan you apply for.

Minimum credit requirements for the five major loan options range from 580 to 680.

  • Conventional loan (backed by Fannie Mae and Freddie Mac): 620 minimum FICO score
  • FHA loan: 580 minimum FICO score
  • VA loan: 620 minimum score is typical (varies by lender)
  • USDA rural housing loan: 640 minimum FICO score
  • Jumbo loan (for high-priced real estate): 680 minimum FICO score

Note that FHA loans actually allow credit scores as low as 500. But if your score is below 580, you need a 10% down payment to qualify. Borrowers with credit scores above 580 only need 3.5% down for an FHA mortgage. 

Other requirements to buy a house

There’s more to know than just credit minimums, of course (which is why underwriting guidelines comprise hundreds of pages).

In addition to credit scores, lenders evaluate borrowers based on:

  • Down payment: Most loan programs require at least 3% down
  • Income and employment history: Most lender want to see at least 2 years of steady income and employment
  • Savings: You’ll need cash to cover the down payment, closing costs, and often cash reserves
  • Existing debts: Your debt-to-income ratio compares pre-existing debts like student loans, auto loans, and credit card minimum payments against your monthly gross income. The lower your DTI, the better
  • Loan amount: If you have lower credit, your loan amount will likely need to be within FHA loan limits or conforming loan limits

If your credit score is weak but you have stable income, a large amount of savings, and a manageable debt load, you’re more likely to get mortgage-approved.

Similarly, you have a good chance at loan approval if your credit scores are high but you’re only average in those other factors.

You don’t have to be great in all areas to secure an approval. 

The key is to understand that lenders look at your full application — not just credit — and to find a loan program that fits your needs as a borrower.

Verify your home buying eligibility (Oct 27th, 2021)

What’s considered ‘good’ credit for a mortgage?

Although it’s possible to buy a house with only fair credit, you’ll get a lower mortgage rate and better loan terms with a higher score.

So what’s considered “good” credit for a mortgage? FICO’s credit tiers are a good starting point, as FICO is the standard scoring model used by mortgage lenders.

  • Exceptional credit: 800-850
  • Very good credit: 740-799
  • Good credit: 670-739
  • Fair credit: 580-669
  • Poor credit: 300-579

Fortunately, you don’t need an “exceptional” score in the 800-850 range to get a prime mortgage rate. Most home buyers don’t have credit anywhere near that high.

In fact, the average credit score for closed mortgage loans in 2020 was just under 750.

Fannie Mae and Freddie Mac give the best rates to borrowers with scores above 740

Mortgage lenders understand that perfect credit is not the norm, and they aren’t expecting sky-high scores.

Fannie Mae and Freddie Mac, the agencies that back most home loans, give the best rates to borrowers with scores above 740 — which means the “average” buyer in 2020 qualified for prime rates.

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The best mortgages for buying a house with low credit

If you have a low credit score, or past red marks on your credit report, the first type of mortgage you should look at is an FHA loan.

FHA loans

FHA loans are mortgages insured by the Federal Housing Administration. This insurance protects mortgage lenders, making it possible for them to lend to borrowers with lower credit scores and small down payments.

In fact, the FHA mortgage program was specifically designed for credit-challenged home buyers. It allows the lowest credit score of any loan program — 500 — although you need a 10% down payment if your score is below 580. Those with a score above 580 only need to put 3.5% down. 

Conventional/conforming loans

Conventional loans also allow a modest credit score of 620 with a down payment of just 3%.

However, the cost of private mortgage insurance (PMI) can make conventional loans unattractive for lower-credit borrowers with less than 20% down.

Conventional and FHA loans both require mortgage insurance. The difference is that FHA charges the same mortgage insurance premiums for all borrowers, regardless of credit. 

Conventional mortgages, on the other hand, have steeply increased PMI rates for borrowers with low credit and a low down payment. As a result, FHA financing can sometimes be cheaper for borrowers with credit in the low- to mid-600s.

VA loans

For veterans and active-duty service members, a VA mortgage is normally the best bet.

VA mortgages are also backed by the federal government (by the Department of Veterans Affairs). They benefit from ultra-low mortgage rates, and unlike FHA loans, borrowers don’t have to pay for mortgage insurance in order to get financing.

There’s technically no minimum credit score for a VA loan. Many lenders set the bar at 620, but determined shoppers can likely find VA lenders that allow credit scores starting at 580.

Check your home loan options (Oct 27th, 2021)

Mortgage overlays: Credit requirements vary by lender

A mortgage overlay is an additional mortgage guideline imposed by a lender, which goes beyond the loan’s official minimum standard.

For example, FHA allows FICO scores as low as 500, but some lenders set their minimums at 620.

According to Fannie Mae, the majority of mortgage lenders apply mortgage overlays. The most common overlay relates to credit scores.

About half of lenders surveyed apply overlays to the minimum credit score requirements of a mortgage loan. Your 500 FICO score, therefore, may not get you FHA-approved, even if the FHA allows it.

This is why it’s smart to re-apply for a mortgage if you’ve recently been denied. Your loan may have been turned down, but that could be because of an overlay. There’s a chance you could be approved by a lender with looser guidelines.

Apply at a different bank, you may get better results.

How mortgage lenders pull credit

When you apply for a mortgage, lenders pull a credit report from all three credit bureaus on you. Their decisions to lend, and the terms of your loan, depend on the result of those reports.

Lenders qualify you based on your “middle” credit score.

For example, if your scores are 720, 740, and 750, the lender will use 740 as your FICO. If your scores are 630, 690, and 690, the lender will use 690 as your FICO.

When you apply with a spouse or co-borrower, the lender will use the lower of the two applicants’ middle credit scores.

Expect each bureau to show a different FICO for you, since each will have slightly different information about you.

In all cases, though, you will need to show at least one account which has been reporting a payment history for at least six months in order for the bureaus to have enough data to calculate a score.

Verify your home buying eligibility (Oct 27th, 2021)

Credit score versus credit history

Your credit score represents your reliability as a borrower in a single number. It’s helpful to have credit distilled in this way, but it doesn’t tell the whole story.

Low credit scores can happen for a lot of reasons. Maybe you prefer paying cash over using credit; maybe you’re too young to have a credit history; or perhaps you carry high balances.

Mortgage lenders understand that a low credit score doesn’t always mean you’re high-risk. That’s why they look at your entire credit history — represented by your credit report — rather than just your FICO score.

Even if your score is on the lower end, a “respectable” credit history can get you approved.

If you have a low score because you haven’t borrowed much in the past (known as a “thin file”), many lenders are willing to look at alternative records not included in your credit report, like rent and utility payments. This can help first-time home buyers get approved even without an extensive credit history.

Similarly, if you’ve had credit issues in the past — like a bankruptcy or short sale — it’s still possible to buy a house.

A bankruptcy can stay on your credit report for 7-10 years. But if you keep your finances in order and make on-time payments following a bankruptcy, you could potentially qualify for a mortgage in as little as 2 years.

Bad credit, though, is different.

Characterized by collections, write-offs, and late and missed payments, “bad credit” will get your loan denied.

If your credit score is low because you’ve failed to make loan payments on time, or you keep all your credit cards maxed out, a lender isn’t likely to overlook these issues. You’ll probably need to take a year or so and work on improving your credit score before you can get serious about buying a house.

What makes up your credit score?

The FICO credit score takes into account the information found in your credit report. Some parts of your credit history are more important than others and will carry more weight on your overall score.

Your FICO score is made up of the following:

  • Payment history: 35% of your total score
  • Total amounts owed: 30% of your total score
  • Length of credit history: 15% of your total score
  • New credit: 10% of your total score
  • Type of credit in use: 10% of your total score

Based on this formula, the largest part of your credit score is derived from your payment history, and the amount of debt you carry versus the amount of credit available to you. These two elements account for 65% of your FICO score.

To put yourself in the best position to qualify for a mortgage, focus on these areas first. Pay your bills on-time whenever possible, and try to reduce your ‘credit utilization ratio.’

Your credit utilization ratio compares the total amount of credit available to you against your current balances; try to keep it under 30%.

This will improve your FICO scores and mortgage loan terms measurably.

How to solve common credit issues when buying a house

If your credit score or credit history is standing in the way of your home buying plans, you’ll need to take steps to improve them.

Some issues — like errors on your credit report — can be a relatively quick fix and have an immediate impact on your score. Other issues can take much longer to resolve.

You should start checking your credit early on, ideally 6-12 months before you want to buy a house. This will give you time to identify issues with your score or report and work on solving them before you apply for mortgage pre-approval.

Here are tips on solving some of the most common credit issues faced by home buyers.

Qualifying for a mortgage with no credit score

It’s possible to qualify for a mortgage even with no credit history.

Many individuals have purchased everything with cash, which is a sign of fiscal responsibility. That’s why most lenders can help you build a ‘non-traditional credit report’ if you have no credit score or history.

The lender will take history from accounts like rent, utilities, and even cell phone bills to build a score for you.

As long as you’ve managed these types of accounts well in the past, there’s a good chance you can get a mortgage even with no credit score.

Getting a mortgage with a thin credit history

One option to boost your credit score is to become a ‘credit card authorized user’ on someone else’s account. You can be added to “healthy” credit card accounts, and that can boost your score.

This strategy can help you if you’re new to managing credit and don’t have many open lines of credit or ‘tradelines.’

‘Tradelines’ are credit-lingo for accounts with creditors. When you’re short on tradelines, it can be hard for the credit bureaus to assign to you a credit score — and hard for lenders to know whether you’re a good borrower.

By joining an existing tradeline account as an Authorized User, you can piggyback on a relative’s or spouse’s good credit standing until you’ve had time to build a credit profile of your own.

Getting yourself “authorized” to use a family member’s credit card can be a terrific way to boost your own credit rating and qualify to buy a house sooner.

Correcting credit report errors

You can and should check your credit report before buying a house. Consumers can get one free credit report per year on annualcreditreport.com.

In the event that you find errors on your credit report, take steps to correct them as quickly as possible.

First, contact the credit bureaus about the errors. You should also contact whichever creditors have provided the erroneous information.

Under the Fair Credit Reporting Act, each of these parties is responsible for correcting inaccurate or incomplete information in your credit report.

For simplicity, disputes can be managed online. If all three bureaus report the same error, though, remember to report the error to all three bureaus. Equifax, Experian, and TransUnion do not share such information with each other.

The law requires credit bureaus to investigate the items in question, usually within 30 days, unless your dispute is considered “frivolous”. Note that you may need to include copies of documents which support your position. Never send originals!

Within 45 days, the credit bureaus will notify you with the results of the investigation.

Then, you’ll want to obtain a new copy of your credit report in order to make sure that the errors have been corrected before applying for a mortgage.

Buying a house with a credit-challenged partner

The upside to buying a house with your spouse or partner is that you’re likely combining two incomes, which can help you qualify for a larger mortgage payment and therefore a more expensive home.

The downside is that one co-borrower’s low credit score can tank the application for both borrowers. That’s because mortgage lenders look at the lower credit score between the two of you to determine your loan options and interest rate.

Depending on your partner’s credit score and income, there are a few different options for how you can approach this issue on your mortgage application.

Consider applying for the loan on your own

Before undertaking a bad credit application, use a mortgage calculator to see if you can qualify for the loan on your own. If your income is sufficient, you can leave your partner off the mortgage altogether.

You can always add them to the property title once the mortgage closes. However, doing this gives your partner some ownership interest in the property, while you would be the only one obligated to pay the mortgage.

Note that if you have joint bank and investment accounts, you can use this money for your down payment and count it as an asset on your mortgage application. Your partner will have to write a letter stating that you have access to 100 percent of the jointly-held funds.

Money in accounts that are solely in your partner’s name won’t be considered assets available to you under most program guidelines.

Use your partner’s income, not their credit

If your income leaves you a little short of being able to qualify for a home loan, you still have options.

Fannie Mae offers a flexible loan program, called the HomeReady mortgage, that allows eligible borrowers to consider income from non-borrowing members of their households.

That means you could use your partner’s income to supplement your own and qualify for a higher mortgage payment, without adding them as a full co-borrower on the loan who would have to go through credit underwriting.

As an added benefit, the HomeReady mortgage only requires a 3% down payment.

Getting mortgage-approved while in credit counseling

Many times credit counseling services put their clients into debt management plans, or DMPs. This can be an appropriate tool for clearing your debts.

With a debt management plan, you make a single monthly payment to your counseling agency, which then distributes monthly amounts to your creditors.

Often, the agency gets the creditor to reduce your interest rate and payment. However, if you are making reduced payments, your creditors can report this to credit bureaus.

That usually takes points from your credit score. In addition, creditors can report that the account is in a DMP if they accept a reduced payment or make other concessions for you.

When you enter a DMP, you usually have to close the included accounts. This can also harm your FICO score.

Finally, know that you will be held responsible (and it will likely be reported on your credit history) if your DMP is late with its monthly payments to your creditors.

Before you commit to a DMP, ask your creditors how the account will be reported to credit bureaus so you can make an informed decision.

How do mortgage lenders feel about debt management plans?

If your credit score and payment history are in their wheelhouse, and your debt-to-income ratio is acceptable, most mortgage lenders don’t care if you’re in a debt management plan or not.

Neither Fannie Mae nor Freddie Mac’s underwriting guidelines specifically mention credit counseling or DMPs for conforming loans that are processed through their automated underwriting systems. 

However, if a human manually underwrites your loan, the decision may be different. Underwriters use their best judgement, and opinions can vary. In addition, conforming mortgage lenders are permitted to “overlay” stricter requirements than agency minimums.

FHA Home Loans and DMPs

FHA mortgage guidelines do mention consumer credit counseling payment plans, and it’s okay to be in one and get a home loan if:

  • You are at least 12 months into the plan
  • You’ve made all required payments in full and on time
  • You have written permission from the counseling agency

This is nearly identical to the FHA stance on Chapter 13 bankruptcies, which are actually court-ordered debt management plans.

Is your credit score high enough to buy a house?

If your credit score is above 580, you’re in the realm of mortgage eligibility. With a score above 620 you should have no problem getting credit-approved to buy a house.

But remember that credit is only one piece of the puzzle. A lender also needs to approve your income, employment, savings, and debts, as well as the location and price of the home you plan to buy.

To find out whether you can buy a house — and how much you’re approved to borrow — get pre-approved by a mortgage lender. This can typically be done online for free, and it will give you a verified answer about your home buying prospects.

Verify your new rate (Oct 27th, 2021)