Your credit score is one of the most important factors when it comes to qualifying for a mortgage—and getting a good interest rate. But the credit score needed to buy a house depends on your lender, where you want to live, and how much you need to borrow.
How Mortgage Lenders Look at Your Credit Score
Your mortgage lender will first look at the type of loan you are applying for to determine the minimum credit score to qualify as well as your down payment amount.
Credit Score Minimums by Loan Type
Since not all loans require the same credit score, here are a few different types of home loans and the credit score requirements for each.
- Conventional: For fixed-rate loans, you should have at least a 620 credit score to qualify for a conventional loan. For adjustable-rate mortgages (ARM), you’ll need at least a 640.
- Federal Housing Administration (FHA): If you have at least a 10% down payment, you can get an FHA loan if your credit score is less than 580. If your score is 580 or more, you only need 3.5% down to qualify. An FHA loan is a mortgage that’s insured by the FHA and is specifically made for those who have little down payment, or fair or bad credit.
- Department of Veterans Affairs (VA): There’s no minimum credit score requirement for these loans that are guaranteed by the VA. VA loans are specifically for active-duty military members, veterans and their spouses.
- U.S. Department of Agriculture (USDA): There are two types of USDA loans—direct loans that are funded by the USDA and guaranteed loans that are backed by the USDA but funded by private banks. There isn’t a set credit score requirement for USDA loans, but you should aim to have at least a 640 credit score for direct loans.
The higher your credit score, the more likely you are to both qualify for a mortgage and for one at a lower interest rate.
When There’s No Money Down
The higher your down payment, the more likely you are to qualify for a loan with a low interest rate, too. If you put at least 20% down and want a conventional home loan, you can avoid private mortgage insurance (PMI)—an added monthly expense to protect lenders in case you default on your loan.
But you’re not required to put that much money down. And sometimes, you can even get a mortgage requiring no money down at all. Just keep in mind that no down payment can have some downsides as well.
With no money down, you’ll have higher monthly payments, potentially a higher interest rate and less chance of approval compared to someone who provides more cash up front. VA loans and USDA loans both offer financing for low- or no-down payment loans. Some private lenders offer this too—but it will vary depending on the lender.
Can I Get a Mortgage With a Bad Credit Score?
While a good—or even an excellent—credit score improves your chances of getting a home loan, it’s still possible to qualify for a mortgage with a bad credit score. Here are a few tips to help you qualify if your credit isn’t the best:
- Increase your down payment. The more cash you have on hand, the less impactful your credit score is to lenders.
- Lower your debt-to-income (DTI) ratio. Your DTI is how much debt you have relative to your income. If you have a high DTI, it means you’ll struggle more to pay your mortgage in case of an emergency. The lower your DTI, the fewer problems you’ll have making payments on time regardless of circumstances.
- Change your expectations. A bad credit score could mean you don’t get to borrow as much as you’d like. This means you might have to adjust your expectations and settle for buying a home that costs a little less in order to qualify for the loan.
Other Factors That Affect Mortgage Qualification
Your credit score is one part of getting a mortgage, but it’s not the only part. Your lender considers many facets of your finances, including:
- Income: How much you earn is a major factor. Lenders want to make sure you can afford to make payments on time every month.
- Job history: A stable job shows lenders you can reliably pay your home loan. Job-hopping, a break in work and self-employed individuals might have a harder time getting a mortgage compared to those who have worked for the same employer for a few years.
- Down payment: The higher your down payment, the smaller your home loan will be. This means you’re less risky to lenders.
- DTI: A lower DTI means lenders you shouldn’t have any problems making payments on your home loan.
- Cost of home: The higher the home price, the harder it can be to secure the full loan amount you want with a bad credit score.
- Derogatory marks on your credit: Derogatory marks on your credit can result from delinquency, defaults and bankruptcies. The more you have, the harder your chances of securing a mortgage can be.
How to Improve Your Credit Score to Buy a House
You could try getting a home loan with a bad score now, but you risk not qualifying for a mortgage or paying more to get the home of your dreams. You could wait a few months and improve your score instead. Here’s how:
- Pay off outstanding debt. If you have old debt that’s hanging around on your credit report, or even high credit card balances, take some time to pay it down. Doing so lowers your credit utilization and also shows a positive on-time payment history to lenders.
- Keep balances low. When you use credit cards, pay them off in full at the end of the pay period. You avoid paying interest and it shows lenders you have the cash on hand to pay for what you borrow.
- Limit new credit. It’s a good idea to limit new lines of credit or loans you borrow when you plan to buy a home. Opening new accounts could lower your credit score initially and even lower your age of credit. So, if opening a new credit card is something you need to do, either do so after you secure your mortgage or months before getting one.
Where to Check Your Score
You can usually check your credit score on any credit card issuer’s app or website, through your bank or other institutions where you borrow money. You can check your scores for free once a year on AnnualCreditReport.com. However, the credit bureaus have allowed a free weekly check of your credit score through 2022 due to the Covid-19 pandemic.
Disputing Errors on Your Credit Report
You can reach out to any of the three major credit bureaus to dispute an error on your credit report, but you’ll need to have proof that the information on file is incorrect or doesn’t belong to you.
The credit agency can take about 30 days to investigate. They will reach out to you, as well as the company in question, for evidence as needed. If the company or lender can’t prove the information is accurate, they must notify the three major credit bureaus so the error can be removed from your report. You’ll get your results in writing, no matter the outcome. Hopefully, this will help your credit overall—and you’ll be ready to embark on your home buying journey.
