What is the best credit score to get a home loan?
The right home loan for others may not always be the best option for you because your mortgage eligibility depends on your circumstances. For example, some people might be approved for a USDA loan, while you might have a better reason to apply for a conventional loan. Several factors will be taken into account by mortgage lenders when they look over your application.
The weightiest criterion, you might say, would be your credit score.
Each type of mortgage requires a minimum credit score. That’s the standard, but at the same time, different lenders can also define their own minimum credit score requirements. So please take note that even as we advise the credit score needed to qualify for a mortgage type, this might not be honored by the lender you’ll approach.
In this article, you’re going to find out the ideal credit score you might want to shoot for as you focus on building credit. With this kind of FICO Score, you’ll get yourself eligible for any loan you might want. However, we hope you don’t use this as a basis to put pressure on yourself. It is still important to consider your particular loan needs or goals by making this home purchase. This number might be a far cry from the minimum credit score of the loan type you’ll truly require.
Why Credit Scores Are Important
Before we get into all of that, though, let’s talk a bit about why credit scores matter, especially if you need to buy a house.
Remember, mortgages are some of the biggest financial transactions we make in life. And for this reason, lenders really need to make sure that you are trustworthy enough to be lent this huge amount of money.
One of the best ways they can use to evaluate your reliability is by delving into your credit history. Of course, your credit report will contain a lot of your personal information. Still, the parts that will matter most to loan officers will be your payment history, credit balances, and inquiry information.
By inquiry, we are talking about credit checks, of which there are two kinds. There are soft checks, and there are hard checks. Soft checks are when you request to see your own report, keeping in mind that you are entitled to one free credit report every year.
Hard credit checks happen whenever you apply for a loan, and a lender asks the credit reporting agency (think Experian, Equifax, and TransUnion) for your report. These hard checks are important because they can signal to lenders how many times in the recent past you’ve needed to apply for a loan.
Through all of the data contained in your report, credit bureaus can compute for your FICO Score, which is just a type of credit score that happens to be the most popular. And with this number, a loan lender can determine whether you meet the qualifications for any of the products and services they provide.
If you have a higher FICO score, this might mean that lenders can afford to lend you a larger amount of money. On the other hand, lower credit scores might encourage them to ask for more financial information from the applicant. As a result, you might need to compensate through a better debt-to-income ratio, bigger savings, or others.
When it comes to borrowing money, it’s worth thinking of credit scores as a measure of your reputation. As in other situations, building a reputation takes time, and it only takes a few missteps for all of your hard work to come crashing down. However, you need to take care of this reputation because you never know when you will absolutely have no other option but ask if you can be lent some money.
Minimum Credit Score Needed to Buy a House
As we have already mentioned, different mortgage loans mean different credit score requirements.
Here are some of the most common loan types that you might end up choosing from as you shop around for a mortgage.
Let’s begin with this government-backed loan that might be a little harder to qualify for regardless of your credit score. And we only say that because you need to have had experience in the military to be eligible.
Needless to say, VA loans are backed by the U.S. Department of Veterans Affairs. Of late, these loans have been surging in popularity, owing to the Blue Water Navy Vietnam Veterans Act of 2019.
Aside from military experience, you also need to have a credit score of 640 to get approved for a VA loan. Once you get approved, though, you’ll be able to enjoy some of the best interest rates in the industry, as well as a zero down payment for your mortgage loan.
Sometimes called traditional loans, the federal government does not insure conventional loans (although Fannie Mae and Freddie Mac can guarantee some). Because they don’t have backing, you have to pay for private mortgage insurance if you make a down payment below twenty percent. This mortgage insurance ensures the lender, and not the borrower, in case the latter defaults.
For this mortgage loan, credit scores really do matter. The higher your credit score, the bigger the amount of money you’ll be allowed to borrow, and the lower the interest rate.
However, these mortgages typically require a minimum score of 620; however, bear in mind that the lender will always have the last say. So you can’t rest on your laurels just yet, even if you already have a 620 credit score. Some lenders might ask for 670 or even more.
If conventional loans are targeted to the more experienced borrower, FHA loans, in particular, aim to cater to the first-time homebuyer. But FHA loans are not exclusive to first-time homebuyers, mind you. As long as you have a minimum credit score of 500, you can buy a house that the Federal Housing Administration will back through an FHA loan.
With a 500 credit score, you will need to make a down payment of at least 10 percent. But if you can get your score over 579, you can be asked to make a down payment of just 3.5% of your home’s purchase price. This is a huge deal! As Experian notes, 99% of borrowers have a FICO Score of at least 500. So pretty much every adult in America can feasibly become a homeowner through eligibility for an FHA loan.
This mortgage insured by the U.S. Department of Agriculture is most different from the rest in terms of credit score.
If the FHA loan is meant for the first-time buyer, the USDA loan was created to promote home purchases in rural areas. This loan type doesn’t actually have a minimum credit score required! But allow us to elaborate.
If you have a credit score of 640, and you are applying for a USDA loan, the loan officer can easily pull up your credit history in their system and approve you. Below this number, however, it seems they have trouble swiftly checking on credit histories and background. If you are aware that your credit score is below 640, you might already want to prepare documentation and explain the factors that caused your lower credit score. Your application will still be considered and reviewed, but it will definitely take some more time than if your credit score is at least 640.
It’s worth it, however, if you weigh in the fact that USDA loans are zero-down payment mortgages. Not needing to make a deposit to secure your loan future is definitely easier on the pocket.
The Ideal Credit Score
Now that we know the credit score requirements for the most common types of loans, it’s time to find out what magic credit score you need if you don’t want to worry about the type of loan.
If a FICO Score of 580 is ideal for an FHA loan, 620 for a conventional loan (or higher, depending on the lender), and both VA and USDA loans will give you a smoother experience with a score of 640, what is the credit score you should aim for?
Our recommendation: 700.
According to FICO, any score under 670 is already a bad FICO Score. This, considering that with 669, you’d already been eligible for all of the mortgages we’ve discussed above. We chose this number, however, due to the current national average.
As per Experian, the average credit score in America is 711. Right now, we are actually continuing to break records in terms of the highest credit score averages ever! In at least one article‘s opinion, this might be because, during the pandemic, people are a little bit more attentive to paying their bills and lessening their debt. Regardless though, if 711 is the national average, we can’t really go as far away from it as 670 if we really want to aim high. In our opinion, you’ll do just fine with 700, and you might even be able to score a jumbo loan with that, depending on how much you think you need to borrow.
At the end of the day, your credit score is really just a number. And it changes more often than you’ll need to take a look. So sit back, relax, and make sure that you always pay your bills on time. Remember that buying a home is just one small part of the bigger picture. Good luck!