What Credit Score is Needed to Buy a House?

It is the American Dream to own a home. However, a purchase this big doesn’t happen overnight. You will have a better home buying experience and you will secure better mortgage loan terms if you are prepared. You want to have your finances in order. This includes cutting down on debt, saving up for a higher down payment and building a higher credit score. It’s this last topic we want to focus on today because it is a question we get a lot at Moreira Team.

Securing the Best Mortgage Rate

Ultimately, your goal with a mortgage is to lock in the lowest rate possible. The better your financial standing, the lower rate you will be able to secure through a mortgage lender. They are qualifying you and taking a risk by approving your loan. When your financial situation is strong and you have a good credit history, you present less of a risk. This will work in your favor when applying for a home loan.

Review Your Financial Standing

Before you even start looking for a house, you should review and improve your financial health. This includes doing what you can to boost your credit score. If your credit history shows a lot of missed or late payments or you don’t have much of a credit record, it will work against you. Having credit cards, student loans, bills and car loans can all be beneficial toward your credit rating as long as you pay your bills on time. Having no credit history is actually a detriment when buying a house, even when your other financial components are strong.

How FICO Scores are Calculated

Before you can buy a house, it is important to establish a good credit history and work to get your credit score (also known as a FICO score) higher. These steps will go a long way toward helping you get approved for a mortgage loan while also securing the best interest rate. Below are the factors that matter most when it comes to your credit score when applying for a home loan. These are listed in order and the percentages reflect how much each factors into your total FICO score.

  1. Credit Payment History – 35%
  2. Your Amount Owed (Current Debt) – 30%
  3. Length of Credit History – 15%
  4. New Credit – 10%
  5. Type of Credit Used – 10%

Credit Score Requirements for Mortgage Programs

So in Atlanta, what credit score is needed to buy a house? The answer isn’t super simple because the score requirements can vary with different types of home loans. There are first-time home buyer programs and government-backed loan products designed to help people with weaker credit histories and credit scores qualify for mortgages. Examples include VA Loans and FHA Loans. 

Generally, the home loan with the lowest possible credit score requirement is known as a “portfolio mortgage loan.” These may be available to borrowers with a minimum credit rating of 500. FHA and VA loans will typically require FICO scores of at least 530. USDA and conventional loans (loans backed by Fannie Mae and Freddie Mac) will require a 620 score or higher. Non-conventional “jumbo loans” can vary depending on the size of the loan. A higher credit score will definitely be required, though some can be approved with scores as low as 620.

Of course, all these requirements will vary from loan to loan and from lender to lender. Other financial factors such as debt-to-income (DTI) ratio, employment history, savings, down payment amount and other details will be carefully reviewed before you are approved for any mortgage loan. You can have a great credit score, but it means nothing if you are in deep debt and unemployed!

How to Improve Your Credit Score

Here are a few tips to improve your credit score:

  • Keep your credit cards paid off or keep the balances as low as possible.
  • Only take credit that you know you are able to repay.
  • Always pay your bills on time, or better yet, pay your bills early, if possible.
  • Avoid high-interest credit situations.
  • Check your credit reports often.

If you are thinking of buying a home in the near future, it’s important to start planning as soon as possible. Check your credit scores and do what you need to do in order to get it higher. It will be worth it when you apply for your mortgage loan. Don’t let a poor FICO score be the reason you get denied a home loan.