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The median mortgage borrower in 2021 had a credit score of 786.1
Most FICO® and VantageScore (the most popular credit-scoring models) scores both top out at 850, which means you’ll need a very good credit score to buy a house with an affordable interest rate.
You’ll get the best rates with a FICO score of 760 or more. The table below has a breakdown of the types of interest rates you can expect at different credit scores.
Average Home Loan Interest Rate by Credit Score
| FICO score | APR | Monthly payment |
| 760-850 | 2.570% | $1,196 |
| 700-759 | 2.792% | $1,231 |
| 680-699 | 2.969% | $1,260 |
| 660-679 | 3.183% | $1,295 |
| 640-659 | 3.613% | $1,366 |
| 620-639 | 4.159% | $1,460 |
Of course, there’s more to buying a house than having a credit history that’s comparable to the average profile. The definition of a “good enough” score will depend on what mortgage loan type you want and your other creditworthiness factors.
Here’s what you need to know about those additional considerations: how they impact the credit score you need to buy a house, and what to do if you can’t qualify for a mortgage yet.
Minimum Credit Score by Mortgage Loan Type
There are five types of mortgage loans. Let’s take a look at each one and their respective minimum credit score requirements.
Conventional Mortgage Loan
Conventional loans are the most common type of mortgage loan. They usually conform to the Federal Finance Housing Agency (FHFA) requirements so lenders can later sell the rights to Fannie Mae or Freddie Mac (giant government-sponsored corporations).
You’ll typically need a minimum credit score of 620 to qualify for a conventional loan.
Jumbo Loan
One of the FHFA requirements is a maximum loan amount of $726,200 (in most states). Loans with balances above that limit are known as jumbo loans.
You’ll usually need a minimum credit score of 700 to qualify for such a large home loan since the financial loss to the lender is greater if you don’t repay.
VA Loan
Veterans Affairs (VA) loans are an incentive to go into the military, so the requirements are less strict than conventional loans, and you can get away with a weaker credit history. In fact, the VA does not impose any universal minimum credit score.
However, the VA doesn’t issue the loans personally (they just insure them). Naturally, the lenders who do issue them also have a say in what kind of loans they’ll accept. They usually require a credit score of at least 640.
USDA Loan
USDA stands for the United States Department of Agriculture. That’s the federal department responsible for insuring these loans. USDA loans are a resource for people in rural areas with a lower credit score and income than is usually necessary to buy a home.
The credit requirements are similar to those of a VA loan. Like the VA, the USDA doesn’t state a minimum credit score, but the lenders who provide VA loans usually ask for 640 or better.
FHA Loan
FHA stands for the Federal Housing Administration. If you have bad credit but are determined to take out a mortgage anyway, an FHA loan might be your best bet. The qualification requirements are often less strict with an FHA lender.
You’ll need a minimum credit score of 580 to qualify for an FHA loan with a down payment of 3.5%. You might get one with a credit score as low as 500, but you’ll need to put down at least 10% to have a chance.
If you want to build a truly excellent credit score, you can learn how to here: How to Get an 800 Credit Score.
Other Factors That Mortgage Lenders Consider
Anyone who has applied for a mortgage since the 2008 housing crash will tell you that the modern mortgage lender wants to know everything about a borrower short of the number of hairs on their head before giving them a loan.
Not only will they pull your credit report and examine your credit history, but they’ll also thoroughly examine every aspect of your finances.
Unfortunately, that means bad credit isn’t their only excuse to stick you with a higher interest rate. But on the bright side, it also means that you may get away with an average credit score if your other financial metrics are positive.
Let’s take a look at the three most important factors that lenders consider in addition to your credit score.
Debt-To-Income Ratio
Your debt-to-income ratio is the percentage of your income that goes toward your outstanding debts.
If a significant portion of your income is already consumed by existing debt each month, lenders are less likely to give you any more, regardless of your credit rating.
To calculate your debt-to-income ratio, divide your total monthly debt service by your monthly gross income. For example, if you earn $4,000 a month and owe a monthly payment of $500 toward your credit card balance, your ratio would be 0.125, or 12.5%.
Your lender will consider your debt-to-income ratio with and without the mortgage you’re applying for during their underwriting. They’ll generally want to see ratios below 28% and 36% respectively, though these are just rules of thumb.
Loan-To-Value Ratio
Your loan-to-value ratio is the percentage of the property value that you’re paying for with debt. It’s usually the inverse of your down payment percentage (unless you’re using multiple loans). If you put down 20%, your loan-to-value ratio would be 80%.
Lenders limit the loan-to-value they’re willing to give a borrower based on their loan type, the property, and their purchase motivation.
For example, you can get a 97% loan-to-value with a conventional loan on your first primary residence. However, on a multifamily investment property, lenders usually won’t go above 70%.
Income and Assets
Having solid financial ratios and a higher credit score than average is important, but lenders will always consider the broad picture of your finances during their underwriting as well.
Remember that mortgage lenders want to gauge the likelihood that you’ll pay them back. Your financial fundamentals have to support a mortgage loan, or the whole discussion is moot.
For example, an applicant with an annual income of $30,000 and no savings will have a tough time qualifying for a $400,000 mortgage, even if they have a good credit score and no other outstanding loans.
There are no hard and fast rules for what income and assets you’ll need for a mortgage, but you need to be able to demonstrate that you can afford your monthly payments.
And if you’re looking to invest in real estate, the lender may have even more requirements than the ones listed here.
Is Getting a No-Money-Down Home Loan a Smart Thing To Do?
A no-money-down home loan may sound like an attractive option for many would-be homebuyers. A whopping 68% of respondents to an Urban Institute survey reported an inability to afford a down payment as the primary reason they can’t buy a house.2
Unfortunately, you may end up paying a lot more in interest and fees over the life of the loan without a down payment.
For example, suppose that you have a credit score of 750 and want to buy a $300,000 house with a 30-year loan. With that FICO score, you’d qualify for a rate of 2.772%.
All else being equal, if you chose to finance all $300,000 instead of putting down a 20% payment of $60,000, you’d pay an extra $28,432 in interest over the life of the loan.
In practice, if you purchase a home with a no-money-down loan, your interest rate might be slightly lower. Only a USDA loan or VA loan would let you skip the down payment, and they have lower interest rates than conventional loans.
Unfortunately, with a USDA loan, you’ll also owe mortgage insurance until you reach 20% equity, which can reduce or eliminate any interest savings.
Ultimately, everyone’s credit profile and borrowing options are going to be unique. You should always shop around with various lenders and get prequalified to make an informed decision.
What if You Don’t Have a High Enough Credit Score to Buy a House?
Buying a house is probably going to be the most significant financial transaction of your life. It’s not something that you should try to do with bad credit.
If you pull your credit report and score only to find that you’re not in the necessary credit score range, work on raising that low credit score before you apply for a loan.
One of the best ways to increase your credit score is with a credit builder loan. Credit Strong credit builder accounts are the ideal combination of an installment loan and a savings account. If you’re looking to raise your credit score 100 points or more, they’re a good start.
Credit Strong customers who make all of their payments on time see an average increase to their FICO credit score of 70 points in just 12 months! Here’s how it works.
When you take out a credit builder loan with Credit Strong, we’ll place the principal balance into a savings account for you. You’ll then make monthly installments to pay off the balance, as usual.
We’ll report your payment history to each major credit bureau so your progress is visible to every lender, whichever credit report they prefer. Unlike credit card debt, these loans won’t negatively impact your credit utilization ratio while you pay them off.
After the final loan payment, we’ll give you access to your funds, which you can then put toward your down payment.
To put that into perspective, if you were to increase your credit score from 690 to 760, you could save $22,755 in interest on a $300,000 loan.
If a credit builder loan option sounds interesting to you, take a look at our pricing and plans to begin building better credit today!
You can learn more about how long it takes to increase your credit score here: How Long Does it Take to Build Credit?
Resources
1 Source: New York Fed: Household Debt Report2 Source: Barriers to Accessing Homeownership (urban.org)
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