What Credit Score Do You Need to Buy a House?
Posted by: Walter Metzen
Even with mortgage rates at an all-time high, many of us dream of owning a home, and a good credit score is still essential if you want to realize the American Dream.
How does your credit stack up, and is it good enough to get the green light for the financial moves you want to make?
In this post, we will run down the credit score thresholds needed to buy a house.
What exactly qualifies as a good credit score when shopping for a home?
Let’s take a closer look.
What goes into a credit score
First, it’s important to understand what a credit score is.
A credit score is a numerical representation of your creditworthiness based on your credit history. It takes into account factors such as your payment history, amount of debt relative to income, length of credit history, and types of credit used.
The most commonly used credit score is the FICO score, which ranges from 300 to 850.
At present, paying rent on time, even for many years, won’t boost your credit score.
Some believe the lack of rental history in credit scores discriminates against disadvantaged groups, and we don’t disagree. Sadly, Experian Boost is the closest thing we have for renters to get proper credit for timely payments.
Credit score needed to get a mortgage
When it comes to getting a mortgage, a good credit score is typically considered to be 700 or higher (source).
This is because lenders want to see that you have a track record of responsibly managing your debt and making timely payments.
A higher credit score can also help you qualify for a lower interest rate, which can save you thousands of dollars over the life of your loan, especially in today’s rate environment where mortgage rates are consistently above 6%.
However, it’s worth noting that some lenders may be willing to work with borrowers who have lower credit scores, as long as they can demonstrate other factors that make them a good candidate for a loan, such as a steady income and a low debt-to-income ratio.
This is why it’s important to shop around and compare offers from different lenders.
For example, Rocket Mortgage is willing to work with borrowers who have a credit score of 620 or higher. From the Rocket Mortgage website:
It’s recommended you have a credit score of 620 or higher when you apply for a conventional loan. If your score is below 620, lenders either won’t be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments.Rocket Mortgage website
Estimated mortgage interest rate by credit score
Excellent Credit (760+)
If your credit score falls into the excellent credit category, you are in the best position to receive the lowest mortgage rates. In today’s mortgage rate environment, this means you may be able to get away with a smaller down payment, and a 30 year fixed rate of 6.3%.
Good Credit (700-759)
A credit score in the good range can also qualify for low mortgage rates, though not as low as those with an excellent credit score. Expect to put 20% down and to pay north of 6.5% on a 30 year mortgage.
Fair Credit (640-699)
If your credit score falls into the fair credit category, you may still be able to qualify for a mortgage, though your interest rates may be higher than those with excellent or good credit. A 20% down payment, proof of long term income, and low debt will help get you approved for a mortgage at around 6.9% on a 30 year.
Poor Credit (Below 640)
If your credit score falls below 640, you may have a difficult time qualifying for a mortgage without a solid work history, low debt to income ratio, and a sizable down payment. You could be paying close to 7% on a 30 year mortgage.
The bottom line
In conclusion, having a good credit score is important for obtaining a mortgage, credit card, or SBA loan. While the specific credit score requirements may vary depending on the lender and type of loan, aiming for a score of 700 or higher is generally a good goal to strive for. However, it’s important to keep in mind that lenders also take into account other factors beyond just your credit score, so it’s important to have a strong overall financial profile.
Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.
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