Credit Scores Matter

NEW YORK – Strictly speaking, you don't need a credit score to buy a house. If you're paying cash, for example, no one necessarily cares whether you have good credit. However, if – like most aspiring American homeowners – you'll need financing, then your credit score is crucial.

Your credit score is one of the most important factors lenders consider when you apply for a mortgage. Not just to qualify for the loan itself, but for the conditions: Typically, the higher your score, the lower the interest rates and better terms you'll qualify for.

So, what is a good score if you want to buy a house? It depends on the type of mortgage you're seeking: Many loans vary when it comes to the credit score needed to qualify. Generally speaking, you'll likely need a score of at least 620 – what's classified as a "fair" rating – to qualify with most lenders. With a Federal Housing Administration loan, though, you might be able to get approved with a score as low as 500.

Why your credit score matters to lenders

Your credit score helps lenders determine your ability to repay the mortgage – and, subsequently, their risk in extending you the loan. The higher your score, the less risk you present.

Another number that mortgage lenders examine carefully is your debt-to-income ratio, or your percentage of monthly debt obligations relative to how much income you bring in. To illustrate, if you earn $4,000 per month and have $1,250 in credit-card bills, loan payments, housing costs and other debts, your debt-to-income ratio would be 31%. The ideal ratio is typically less than 36%, though some lenders will accept more with a higher down payment.

Credit score by mortgage type

There's no single, specific credit score that will automatically qualify you for a mortgage, but lenders often have minimum credit-score requirements. The minimum credit score to be eligible for a mortgage depends on both the lender and the type of loan.

• Conventional loans: Conventional loans are mortgages offered by commercial banks and savings-and-loan associations. Generally, the higher your credit score, the more likely you'll qualify for a mortgage loan with these lenders. Many will accept a credit score as low as 620, but they may have other requirements, such as a higher income or a larger down payment.
• FHA loans: The Federal Housing Administration insures loans geared toward borrowers with lower credit scores and down payments, especially first-time homebuyers. You might qualify for an FHA loan with a credit score of 500 to 579 with a 10% down payment or with a 3.5% down payment if your score is 580 or higher.
• USDA loans: The U.S. Department of Agriculture guarantees this loan program for low to moderate-income borrowers purchasing a home in a qualifying rural area. Borrowers generally need a minimum score of 640 to qualify for a USDA loan. In some cases, USDA lenders may consider a lower score with additional analysis of a borrower's credit.
• VA loans: Guaranteed by the U.S. Department of Veterans Affairs, VA loans are offered to active and veteran military personnel and their families. The government doesn't have a minimum credit-score requirement to qualify for VA loans, though many lenders – who actually extend the financing – require a minimum score of 620.
• Jumbo loans: Jumbo loans are larger-than-normal-size mortgages that exceed the conforming loan limits established by Freddie Mac and Fannie Mae – $766,550 in most markets, as of 2024. Many jumbo lenders require a credit score of 700 or higher to qualify because of the increased risk that comes with borrowing such a large amount.

How your credit score affects your mortgage rate

Although it's up to specific lenders to determine what score borrowers need to receive the lowest mortgage interest rates, a difference of just a few points on your credit score can sometimes affect your monthly payments substantially. For example, on a $300,000 mortgage, the difference in principal and interest payments between a 7% interest rate and a 6.5% rate is $99 per month. That comes out to more than $35,000 over the course of a 30-year mortgage term.

"A low credit score can make it less likely that you would qualify for the most affordable rates and could even lead to rejection of your mortgage application," says Bruce McClary, senior VP of communications for the National Foundation for Credit Counseling.

What is a good credit score?

When considering the best credit score to buy a house, many lenders use the FICO model. It grades consumers on a 300-to-850-point range, with a higher score indicating less risk to the lender. FICO scores range as follows:

• 800 or higher: Exceptional
• 740-799: Very good
• 670-739: Good
• 580-669: Fair
• 579 or lower: Poor

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