What Is The Ideal Credit Score To Buy A House? - House Digest (2024)

Real Estate Buying Tips

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ByEmily Hopkins/June 2, 2022 8:42 am EST

As an aspiring homeowner, understanding credit scores and their considerations in buying a home can help you ease the entire process. A higher credit score is a sign to the mortgage loan lender that you can comfortably pay your debt in the future, enabling you to easily qualify for the loan, Rocket Mortgage notes. While higher scores guarantee lower interests, you can still get a suitable mortgage with lower scores depending on the lender and loan type you want.

Most lenders have set minimum credit scores for each loan type; therefore, you must know where your score lies and the loan you might qualify for before you hit the bank. While this topic can be a bit confusing, this article will help you grasp the ideal credit score you need to purchase a house and the different kinds of mortgages you can get. So tag along and get to know more about your scores in detail.

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The average credit score you need in order to secure a loan when you want to buy a house is at least 620, Quicken Loans says. Lenders weigh your scores from each of the three main credit rating bureaus and accredit you using the median or middle score. This merely applies if you are the only one applying for the loan. In the case of more than one loan borrower, the lender considers the lowest median score among all the mortgage applicants.

On the other hand, the minimum credit score varies from one mortgage type you want to the next. Although you are still liable for a mortgage with lower scores, most lenders favor higher numbers. Therefore, the higher your score, the better your chances of getting a loan. According to Rocket Mortgage, it's important to note that the lowest median score is usually the one recorded for your loan rate.

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As detailed by Rocket Mortgage, various loan types will define your minimum FICO score, with the number varying from 300 to 850. This includes conventional mortgages and loans from government agencies. Conventional mortgage loans are acquired from private lenders to buy a house and are not covered by any government agency. However, the required credit score for a conventional loan is higher, with a minimum score of 620. Therefore, this loan type is best suited for you if you have great credit, backup cash for a down payment, or are ready to pay the loan at a higher interest rate.

On the other hand, FHA loans don't need a higher score and are insured by the Federal Housing Administration, making it easier to qualify as a homeowner with lower credit scores. For example, you can be eligible for an FHA mortgage with a minimum credit score of 580. VA loans are also government-backed and don't have any set average credit score when buying a house. This choice is better if you have served as a veteran or are a spouse to one. However, some agencies will give you a VA loan for at least 580 scores. Is your income less than 115% of your area median earnings? Then you should opt for USDA loans. This kind of mortgage best suits you if you are a suburban or a qualified rural area resident. The minimum credit score for the loan is 640.

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It is important to take a closer look at your credit report history after knowing the scores for each loan type. Check the numbers at least once a year to detect any earlier issues that might affect your mortgage process. Rocket Mortgage explains that you can easily channel your credit score to meet the lender's demands for a better mortgage rate when you have this understanding.

You can always check your score and track your profile with the help of a platformspecifically designedfor this, like Rocket Homes. A sister to Rocket Mortgage, they will give you timely updates every week. Tracking your credit profile will help you weigh your options on the kind of loan to apply for and when.

Besides, lenders also consider several other factors to deduce whether you qualify for a loan. The most common one is the FICO score, which aids in calculating the fees and interest rates you will need to pay for your mortgage. Other aspects you should also check include the type of your credit, length of your credit history, your new credit, payment history, and how you use your credit.

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When you plan on buying a house, you need to take the right measures to increase your credit score. Rocket Mortgage extensively explains the following steps that will help you improve your credit score. The first step is to make full payments on the debt you have to cover since this is the best way to increase your credit score. If you already have debts, avoid adding more to existing credits. Paying the debts will enhance your ratio of credit utilization and the amount you spend compared to your total credit limit. This way, lenders will see that you are a less risky borrower.

The next step is to pay all your bills on time, including utility and cellphone bills. This will show the loan lender how reliable you are and whether you will pay your loan in the future. Another thing is to avoid applying for more credit cards to avoid any inquiries that might affect your score. Quicken Loans also recommends becoming an authorized user on a credit card account to boost your credit score. The numbers slowly improve when the primary user in your family makes a payment.

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Apart from credit scores, some other pointers lenders consider, according to Rocket Mortgage, include the debt-to-income ratio (DTI), which is the share of your total monthly income that is used in paying off what you owe. The less debt you have, the easier you will be able to buy a house sooner since lenders consider you less risky. You can divide the number of your debts by your monthly income to calculate your DTI. Besides, when lenders consider your mortgage criterion, your income and assets also come to light. They will want to ensure that you have a stable means of income with at least a two-year proof of your employment and assets.

Another consideration is your loan-to-value ratio (LTV) which helps lenders assess how risky giving you money will be. It is calculated by dividing the loan amount by the house acquisition cost. Lenders consider higher LTV riskier since it means your mortgage will cover most of your house's price. However, when your down payment increases, the LTV will go down. Depending on the type of loan you go for, some lenders might require you to pay mortgage insurance if your LTV is over 80%. So, to avoid the risk, your ratio should be less than 80%.