If you’re in the market to buy a home, knowing what kind of shape your credit score is in can give you an idea of whether you’ll qualify for a loan and what kind of interest rate you’ll pay. Loans are necessary for most future homebuyers because they cannot afford to pay cash upfront.
How hard is it to buy a house?
While lenders look at your income, debt and savings when making mortgage decisions, your credit score is the biggest factor in determining whether you get approved or rejected for financing. That’s why it’s so important to check your credit report regularly so you can gauge the overall state of your financial health.
If you want to buy a house soon or are looking into house refinance for an existing mortgage, checking your credit score should be at the top of your to-do list. Here’s a look at just how important your credit score is for mortgage lending decisions.
Find out how your credit score compares to Credit Sesame members who have a mortgage loan. (Data is based on nearly 140,000 Credit Sesame members who have a mortgage; 67,000 Credit Sesame members who have an FHA mortgage.)
- Credit Sesame members who have a conventional real estate mortgage: Average score is 682
- Credit Sesame members who have an FHA mortgage loan: Average score is 649
- Credit Sesame members who do not have a mortgage (or FHA loan): Average score is 613
What is a house mortgage?
Before we get into the details of buying a house, getting a mortgage, and what your credit needs to look like, let’s back up and lay out exactly what a mortgage is. A mortgage is a loan specifically used to finance the purchase of a home.
A house mortgage is likely the largest loan you will ever take on and that is why they have multiple parts and they can last 15-30 years. Mortgages include collateral, a down payment, taxes and insurance. It is important to keep these different parts in mind before deciding whether you can take on this much debt. Once you’ve decided to take the plunge, you’ll need to know what it’s going to take to get your dream home.
What’s the minimum credit score to buy a house that lenders are looking for?
The minimum credit score needed to buy a house isn’t set in stone and in fact, it can change quite often especially during and after a recession when the economy is on a downturn. It’s not unusual for lenders to enforce tighter restrictions on borrowing when the economy is shrinking instead of expanding. In the wake of the housing collapse, for instance, applicants with credit scores of 720 and above were getting rejected for mortgage loans.
Fortunately, the real estate market has improved dramatically since 2008 and lenders have eased up a bit in terms of the minimum credit score they’re looking for. The minimum score also depends on the type of loan you’re applying for.
With a conventional loan for a house that’s backed by Fannie Mae or Freddie Mac, for example, the minimum score required is set at 620. But the lowest credit score to buy a house with an FHA loan is 580.
Keep in mind, however, that individual lenders may raise the bar higher based on other factors, such as your income or how much of a down payment you’re putting down. That also affects your interest rates. As a generalization, the average credit score to buy a house is 600 or above.
The following chart shows the average scores of Credit Sesame members. Where do you fall?
For example, let’s say you have a 640 credit score and you want to buy a $200,000 home. You have $20,000 to put down which qualifies you for an interest rate of 5%. At that rate, you’ll pay nearly $170,000 in interest on the loan. If you could bump your down payment up to $40,000, which is 20% of the purchase price, you’d get a rate of 4.5% instead. That would shave roughly $35,000 off the interest charges.
Credit Sesame members who have mortgages actually have higher credit scores than those who do not.Rental History Reports]
What credit score do mortgage lenders use and other than that what is needed to buy a house?
The minimum credit score you’ll need to buy a home also depends on which credit score mortgage lenders are looking at. The FICO score, developed by Fair Isaac, is the most popular scoring model in the industry. Approximately 90% of mortgage lenders use this to determine your credit score and decide whether or not to approve you for a loan.
[Learn More: Highest Credit Score Possible]
The VantageScore is an alternative to FICO scores that’s rapidly gaining in popularity. The VantageScore system was developed by Experian, Equifax and TransUnion and it considers things like your payment history, the amount you owe and the age of your accounts.
Both VantageScores and FICO scores range from 300 to 850 but because the two models use different algorithms, it’s possible for your scores to vary widely.
Apart from your credit score, lenders will look at your employment and yearly income to make sure that you will be able to make payments on time each month. They are looking to see if you have a steady source of income.
Lenders will also look at the area you are looking to purchase a home in because there are outside factors that might make increase the risk thereby increasing the credit score needed to secure a mortgage loan. As you can tell, there are many different requirements to buy a house so do not take the decision to become a homeowner lightly.
Here’s how to buy a house with bad credit
When you’re interested in buying a home but your credit isn’t that great you may be worried about having to put down a large payment or getting declined for a loan altogether. While bad credit can impact the interest rate you’ll pay on a mortgage it doesn’t have to be an obstacle to buy a home. You can still find house loans with bad credit, you may just have to put in a little extra work – and money.
Even if you have faced bankruptcy or foreclosure recently you still have a great shot at getting a mortgage without paying excessively high rates or need thousands of dollars to put down. That’s thanks to government-created mortgage programs that are trying to get the housing market back on track by helping Americans buy homes with poor credit.
[Learn More: What is a Bad Credit Score?]
If you do not have the minimum credit score to buy a house, here are some house-buying tips you can take to qualify for a mortgage
1. Get organized – Your lender’s going to want to see certain financial documents when you’re applying for a loan and this is especially important when you have bad credit. Specifically, you need to be able to prove that you can pay your bills on time, save money and pay down your other debts.
Some of the things you should be collecting before you approach a bank include your tax returns for the last year, pay stubs, bank statements, W2s, statements for investment or retirement accounts and a list of your debts, with the amount owed and your monthly payment.
2. Consider a co-signer – Getting help with a mortgage may be a good idea if you have a poor credit rating or not enough credit history to generate a score at all. Enlisting the aid of a co-signer with a solid credit rating can significantly increase your chances of getting a home loan.
The co-signer is essentially taking on joint responsibility for the loan, which gives the lender security if you default on the loan. Just make sure to pick someone with a good credit history and be aware of how their credit can be impacted if you miss a payment.
3. Apply for an FHA Loan – An FHA loan is a mortgage that’s insured by the federal government and directed by lenders involved in the program. As mentioned earlier, FHA loans have lower credit requirements than conventional loans and borrowers can apply even if they have a bankruptcy or foreclosure on their credit report.
The other upside of an FHA loan is that instead of requiring a 20% down payment, it’s possible to buy a home with as little as 3.5% down.
[Sign up for Credit Sesame and get a Free Credit Report Card]
Buying a home with bad credit may be a little more challenging but the options outlined here offer a way to bypass a lower score so you can get the financing you need for the home of your dreams.
How to buy a house with no credit
There are plenty of reasons why someone’s credit file may look a little thin. Maybe you’ve always paid cash for things and never had any inclination to use credit cards. Maybe you’re getting divorced and any credit lines you had were in your spouse’s name. If you’re in a situation where you have no credit history at all it’ll be tough to get any kind of loan, especially to buy a home but it’s not impossible if you know what your options are.
As we mentioned before, an FHA loan is a great option for a house loan, not only for those with poor credit history but also for those without one at all. Just keep in mind that if your credit score is below the 580 minimum, you won’t be eligible to put down 3.5% on a home loan. You’ll have to pony up 10% of the home’s purchase price instead, which may mean saving a little longer before you try to buy.
[Learn More: What Affects Your Credit Score]
Getting a credit card in your name is another good way to build credit fairly quickly. If you have no credit at all, you may only be able to qualify for a secured card to start. With this kind of card, you put up a cash deposit that serves as your credit line. As long as you’re keeping the amount you spend to a minimum and paying the card off in full each month, that can help you create a positive credit history and generate a credit score.
If you’re cautious about using credit cards, getting a recommendation from your landlord, a utility bill for the past 12 months, or evidence of your paying your insurance premiums are other great ways to prove that you’re responsible about paying your bills on time.
If you have enough money saved up, then paying a larger down payment will also increase your chances. Note that aiming for a loan with a larger bank may not be your best bet – local banks and lenders are more likely to accept your offer.
Renting to own is another option when you lack a lengthy credit history. With this type of arrangement, you make a monthly rent payment to the owner plus an extra amount that’s put into an escrow account. When you’re ready to apply for a loan the money in the escrow account can be used as your down payment or be deducted from the home’s purchase price.
If you’re able to negotiate owner financing instead of going through a bank, your lack of credit may not be a factor. Just make sure to have a lawyer inspect the contract before you move forward with this kind of plan.
Get your credit score ready to buy a home
If your credit score isn’t where you’d like it to be, you should be working on bringing it up before you start talking to lenders. This is something that you should be doing sooner rather than later since it can take a few months to see any significant improvement in your score. You can check your credit score for free on Credit Sesame.
Check out our free e-guide that shows you how you can get your credit ready for a mortgage.
The first step to getting your credit in shape is clearing up any problems as far as your credit report goes. That includes disputing any errors or other inaccurate information that could be dragging your score down. Approximately 1 in 5 Americans has an error on their credit report according to the Federal Trade Commission so it’s in your best interest to take a peek at your credit history before applying for a loan.
When checking your credit, make sure you get copies of your report from all three of the major credit reporting bureaus. Not all creditors report to all three bureaus so information that shows up on one of your reports may not appear on the other two. If you’re not looking at all three, it’s possible that you could overlook something.
Another thing you can and should be doing is paying down your existing debts. Lenders are looking for borrowers whose debt to income ratio is below the 30% mark so if you’re spending more than a third of your income servicing debt each month, chipping away at the balances can boost your odds of getting approved for a loan. Freeing up more of your credit line also helps your credit utilization which has a positive impact on your score.
Raising your credit score isn’t something you can do overnight but it’s possible if you’re taking positive actions. Paying down debt, keeping your applications for new credit to a minimum and removing errors from your credit report can go a long way towards getting your credit score mortgage-ready.