What is the lowest credit score needed to buy a home?

Often, those last 10 seconds before you see your credit score are the scariest. Even if you have been religiously paying your bills on time or watching your card utilization rates, there can be a brief moment of self-doubt as you move to face this fear. This is perfectly normal!

Most of the time, you’ll find that your credit score is not as bad as you thought it might be. Once you have gotten over this fear and relief washes over you, you can get to work on the next step towards getting that dream home.

At this point, the typical next question in the minds of potential mortgage borrowers is, “What’s the credit score to buy a home?” Followed by, “What can I do to improve my mortgage chances?”

If these are the queries dancing in your head, we want you to know that you’ve come to the right place. Your FICO Score is indeed one of the biggest determinants for your mortgage approval as well as fees and other charges. Once you know that you can qualify for a loan, it is paramount that you still work towards increasing your credit score so that you can pay less while you acquire more space for yourself and the ones you love.

Just read on to find out!

What is a good enough credit score to buy a house?

It’s a bit tricky to give a general answer to the question, “What’s the lowest credit score I can have if I want to buy a house?” It will really depend on what you will need.

The mortgage industry is very complex, and with the thousands of lenders giving out loans in the market, no two deals are the same. In fact, some people can get by without a credit score, and you’ve probably even heard about those who’ve tried manual underwriting. These are all valid ways to enable borrowers to live in the kind of home they want.

To understand the importance of credit scores to your mortgage application, let’s hear about the credit score requirements for some of the most popular home loans out there.

Type of Loan According to Minimum Credit Score

FHA Loans

If some styles in fashion can be expected to never go out of style, there is also a type of loan that you can expect to stay in demand for more years or decades to come.

This is the Federal Housing Administration loan (FHA loan) that will allow you to purchase the house you need even if you have a credit score as low as 500. This is the absolute minimum credit score needed to buy a house in America if you want to choose your home and buy it using a mortgage freely.

With a FICO Score of 500, you can make a 10% down payment to borrow up to 90% of your home’s purchase price. But if you can get your score up to 580, you can be allowed to put down as little as 3.5% as an initial payment that can even be taken from a grant or cash gift from a relative.

FHA loans are really meant for first-time home buyers, but anyone can qualify as long as they meet this minimum FICO Score.

Conventional Loans

Conventional loans are oftentimes also called traditional loans. This is because they are not government-backed, and you are obligated to pay private mortgage insurance if you make a down payment of less than 20 percent.

This type of mortgage typically requires a credit score of 620, although you can find several mortgage lenders who tend to demand higher credit scores. This usually depends on the loan amount you want. With a lower credit score, you can expect to be given a much higher interest rate, although you can balance this out by making a bigger down payment.

VA Loans

The government-backed VA loan program is understandably exclusive to military service members and their eligible spouses. But it’s not enough to have military experience to qualify for a mortgage insured by the Department of Veterans Affairs. You will also need to have a credit score of at least 640 if you want to secure this type of mortgage.

The VA loan is currently one of the most powerful mortgages in the market. Its zero-down payment requirement and competitive interest rates have emerged as one of the go-to mortgage options even during the COVID-19 pandemic. And this is all thanks to the Blue Water Navy Vietnam Veterans Act of 2019, which removed the previous loan limit, now allowing potential borrowers even to buy million-dollar homes. So if you can qualify for this loan type, you really will be missing out if you pass this offer up.

USDA Loan

Finally, the USDA loan option is just in case you are purchasing real estate in a qualified rural area as defined by the U.S. Department of Agriculture.

USDA loans are noteworthy because they are not very strict when it comes to credit score requirements. You might even be able to avail a mortgage with a FICO Score that won’t qualify for an FHA loan. However, when you have low credit, you might only be allowed to borrow up to a certain amount of money, and you will have to make sure that other factors they look at in your application will paint a better picture of you as a borrower.

Like VA loans, USDA loans do not ask for a minimum down payment, although you have to keep in mind that the less equity you initially own, the more expensive your total charges will become over the life of your loan. You are also not allowed to use a USDA loan to fund an investment home or vacation house, so you have to make sure that the house you’ll be buying will become your primary residence. But in case all of these conditions do not pose any problems with you, this is the best mortgage to get especially if you are really looking for a loan out there with the lowest credit score requirements.

Credit Scores and Home Loans

Every borrower has their own particular needs, particularly since we’re talking about the safest space in our lives. Some people will want to buy a house because they are trying to settle down and build a family, and yet others might want to have a nice place to stay whenever they feel like taking a break. Whatever your reasons are for wanting to buy a home, you will also have another set of reasons for wanting to do so via a mortgage.

Now that you probably know a little more about home loans than you did yesterday, you must have an idea of the best option you will need to take. And if you have already seen your credit report, you will have had time to reflect on your recent finances and readiness to take on this fresh new challenge.

The good news is, if you have a credit score starting at 600, this is already enough to qualify for a mortgage insured by the federal government, and it will take just a few months more work to get your score to a higher level than will grant you more power.

On the other hand, If you have a credit score below 580, you might want to delay any application plans for the moment so that you can brush up on your finances to acquire more options.

As you have probably realized by now, you don’t actually need a stellar credit score to get approved for a loan. However, when you have a high credit score, this can mean lower interest because the mortgage lender can more confidently let you borrow money. You can also be the proud owner of a bigger home because this means that you are actually capable of making payments.

So what can you do to widen not just your chances of getting approved but also the loan options that will give you more competitive rates? In the next section, we hope to give you tips to help you buy a house that’s right for you without having to shell out more money than you should.

What can I do to improve my mortgage chances?

Regardless of your credit situation, you are probably already qualified for a loan type or two. Doing the following steps, however, will help you boost your credit score further and help you get lower interest so that you can pay your money straight to your savings instead of to mortgage lenders.

1 – Check your credit more often.

Some people are scared of checking their credit because of the fear of where it might be and because they think that doing so will do more harm. First of all, this is a misconception because there is a big difference between hard inquiries and soft inquiries.

Basically, when someone looks at your credit due to a pending application, this is a hard inquiry. Otherwise, when someone pulls your credit, and oftentimes this is you, to look at the general situation, this is merely a soft inquiry, and it doesn’t affect your credit at all.

Furthermore, there are different things you can do to know your FICO Score for free. There’s Credit Karma and AnnualCreditReport.com, which the federal government officially authorizes to ensure your right to a free credit report. Now and then, you’ll read about places that will charge a fee to let your credit score, and if you do, just run away in a different direction!

Knowing your credit score at any given time is just like checking your weight on the scale. It lets you keep track of your progress, and it will push you to keep doing better. If you’re not convinced, realize that you probably came across this article after you saw your credit report, and you decided that it’s time you do something about it. And now, you are well on your way!

2 – Pay yourself first.

You will hear a lot of financial advisors telling you to do this, “Paying yourself first is the first step to financial freedom.” But what does this really mean?

Simply put, the concept of paying yourself first is making your savings your priority instead of putting away money last whenever you get your salary. Its basic goal is to help you grow your savings to have more money you can invest.

When you are treading along the mortgage route, however, paying yourself first can become more meaningful. Buying a home is an essential investment in yourself. You’re saving money as well as acquiring an asset when you really think about it. But, just as when you’re building your savings, you have to pay yourself first, and for mortgages, this includes paying down your debt since you are beefing yourself up for the biggest financial transaction you’ll ever make in your life.

As you can see, this step is really twofold. Aside from saving money, you also have to lessen your liabilities. And hopefully, this will also help you improve your financial habits overall. But, hey, it’s never too late to start trying!

3 – Get pre-approved.

They say that getting pre-approved for a mortgage is a step you shouldn’t miss in your mortgage journey. It will give you a general idea of how much house you should be looking for and give you a bargaining chip in case the house you want receives several offers from other potential buyers.

Getting pre-approved is definitely a good idea to increase your mortgage chances. It might be hard if you actually get rejected at this stage, but it will be even harder once you already have a house on your mind and you find out that you cannot be approved. But, like getting over the fear of knowing your credit score, this is a necessary hurdle you need to overcome if you really want that motivation boost.

Remember, this is a problem that several have faced before. You are in good company. Go for it!