A credit score is a number — between 300–850 — that tells lenders a story about a consumer’s creditworthiness. Credit scores can be confusing even for the financially astute, but in general, the higher the score, the more attractive a borrower will be to potential lenders because it shows the lender you’re likely to repay your loan on time.
That said, you don’t need perfect credit to qualify for a mortgage to buy a house. There isn’t even a strict minimum score that you have to have — though there is a threshold that will boost your chances of qualifying for a mortgage, and even that minimum varies depending on what type of mortgage you are looking to secure.
Keep in mind that while your credit score plays a big role in the mortgage process, lender don’t look at your credit score in a vacuum; they take into account several factors, like income, income history, property type, assets and debt levels, and down payment amount, when deciding whether to approve you for a loan. The stronger you are in these areas, the more likely you are to get away with a lower credit score overall.
There is a downside to lower credit, however, and it is that you’ll pay a higher interest rate. So it is worth it to keep working on improving your credit score so that you can refinance for a better rate in the future.
Types of Mortgages
The credit score you need to buy a house depends on the type of loan you are seeking. There are many types of loans, but here we’ll outline the three most likely options: Conventional, FHA, and VA.
Conventional mortgages are home loans that follow the standards set by Fannie Mae and Freddie Mac and are uninsured by any government agency. Conventional loans are typically best for those with good or excellent credit because if you have a solid credit score, you’ll usually be able to qualify for a conventional loan with a low down payment requirement and a low interest rate.
As mentioned, lenders have different requirements and may require different scores, but conventional mortgages generally require a credit score higher than 620.
FHA Loans are insured by the Federal Housing Administration, which makes them less risky for lenders. As a result, FHA loans may be easier to qualify for than conventional loans and are more lenient on those with lower credit scores and past bleak marks on their credit report.
In fact, the FHA mortgage program was specifically designed for credit-challenged home buyers. So this program allows the lowest credit score of any loan program — typically 500 or above. The amount of your down payment will vary pretty drastically depending on how close to you are to 600, though. Below 580 you’ll probably need at least a 10% down payment; above 580 and you could put down as little as 3.5%
If you are a member or veteran of the U.S. Military, U.S. Military Reserves, or National Guard, or the spouse of a military member who died while on activity duty or because of a service-related disability, you could qualify for a VA Loan. These mortgages are, like FHA Loans, also backed by the federal government.
VA Loans are a savvy financial move for those who fit the requirements because mortgage rates are exceptionally low, these loans don’t require any down payment, and VA borrowers don’t have to pay mortgage insurance. There is a one-time funding fee, which is determined by your down payment and the type of military service completed, however.
The Department of Veterans Affairs does not set a minimum credit score for VA loans, though private lenders that originate these loans usually like to see credit scores above 580.
So What Credit Score Will Help Most?
You don’t need exceptional credit to get a prime mortgage rate, but it is true that a higher rate will give you the best terms on your home loan. Mortgage lenders understand that perfect credit is something we strive for, but sometimes fall short, so they look at a host of factors — like stable income, a large amount of savings, and a manageable debt load — as well as credit score when determining if you’ll be mortgage-approved.
The average credit score for closed mortgage loans in 2020, a very active year for the real estate industry as well as mortgage refinancing, was just under 750. And Fannie Mae and Freddie Mac give the best rates to borrowers with scores above 740. This is considered Very Good Credit… but it is far from Exceptional.
FICO Credit Tiers:
- Exceptional credit: 800-850
- Very good credit: 740-799
- Good credit: 670-739
- Fair credit: 580-669
- Poor credit: 300-579
Still, to put yourself in the best position to qualify for a mortgage, strive for the best credit score you can reach. To do this, pay your bills on-time whenever possible, and try to reduce the amount of debt you owe.
You don’t need perfect credit to qualify for a mortgage, but you’ll get better mortgage terms the better credit you can achieve.