Unless you bought thousands of dollars in Apple stock in the 1980s or invested in cryptocurrency when a bitcoin cost less than a dollar, you're probably going to need a home loan to buy a house, and to get a good rate — or to get a loan at all — you need to maintain a minimum credit score. Most people will be looking for a conventional loan, and for that, your credit score needs to be at least 620. Other types of loans require lower or higher scores depending on the loan amount and whether or not the loan is backed by a government agency.
Your credit score isn't the only factor lenders examine when deciding whether or not to give you a home loan, but it's definitely one of the most important. In a nutshell, it tells mortgage lenders how much you already owe and how successful you have been over time in handling debts. A spotty credit history resulting in a low credit score doesn't necessarily mean you won't get a loan to purchase a house, but you'll either have to come up with a larger down payment or settle for an interest rate that will end up costing you many thousands of dollars more over the life of the loan.
For a conventional loan, your credit score will need to be at least 620.
Your Credit Score Explained
The Fair Isaac Corporation (FICO) introduced the first formula for analyzing consumer credit information in 1958 and rolled out the first FICO scores in 1981. The FICO score is a three-digit number between 300 and 850 (sometimes 900) determined by data supplied by one or more of the three major credit reporting bureaus: TransUnion, Equifax and Experian. Although creditors have always had access to credit scores, it used to be difficult for consumers to access them, but that is quickly changing, as many credit card companies provide easy access to FICO scores on their website.
Although different interpretations exist, a FICO score below 600 is considered poor, one between 601 and 660 is fair, one between 661 and 780 is good and one between 781 and 850 signifies excellent credit. Your FICO score doesn't only include information about consumer loans and credit cards. The most modern version, known as FICO 9, also includes information about unpaid medical bills and bills sent to collection agencies as well as your rental history, and landlords almost universally use it to determine whether or not to rent you living accommodations.
Maintaining good credit is obviously important in an economy dominated by credit, and without it, you can have trouble getting a credit card, securing a loan for a house or a car or securing accommodations for yourself and your family. You won't necessarily have to go without these things, but you'll have to pay more for them than someone with good credit, and that can dig you even deeper into a financial hole. If bad credit is standing between you and the house of your dreams, it's important to evaluate just how badly you want that house considering that you'll pay much more for it in the long run.
Expensive Markets Equal Higher Credit Scores
The benchmark minimum credit score of 620 doesn't apply to nonconventional loans, otherwise known as jumbo loans. They are loans that exceed $548,250, a number determined by the Federal Housing Finance Agency, and if you've been shopping for a new home, you probably know that high housing prices in many parts of the country often require you to apply for this type of loan. For example, the median housing price in California in 2020 was well over $600,000, and in some areas of the state, such as the San Francisco Bay Area, it's much higher.
If you're planning a move to the Golden State or to any other state with a similarly high-priced housing market, you'll need a minimum credit score of 700 to qualify for a nonconventional home loan. In other words, you don't just need fair credit — you need good credit. This is another example of how minimum credit score requirements affect your ability to secure housing. Even if you find a lender willing to approve a jumbo loan based on fair credit, the loan will come with a higher interest rate, and when you're borrowing that much money, the payments may end up costing more than you can afford.
Home Loan Solutions for Bad Credit
Lenders ultimately make the final decision on whether or not to grant you a loan, and some will offer high-interest loans to people with scores lower than 620, although a score below 500 is pretty much universally disqualifying. They may prioritize certain parts of your credit report, or they may overlook a derogatory item that's pulling down your score, such as a bankruptcy, if you can offer a large down payment. Failing coming across an especially generous lender, you may qualify for one of the following government-backed loans:
- FHA home loan: Backed by the Federal Housing Administration, FHA loans are available to first-time homebuyers with a low to moderate income. You can qualify for this loan with a credit score of 580 if you have a 3.5 percent down payment. You can even qualify with a credit score of 500 if you have a 10 percent down payment.
- VA home loan: Available to members of the military community, these loans are backed by the U.S. Department of Veterans Affairs. Technically, no minimum credit score is required, although a score of 620 is preferred.
- USDA home loan: The United States Department of Agriculture offers loans for low-income families seeking to purchase a qualifying home in a rural area. The minimum credit score to qualify is 580.
The more cash you can raise for the purchase of a new home, the better. A large down payment may reduce the size of the mortgage loan from a jumbo loan to an easier to obtain conventional one, and in any case, it reduces the risk factor for the lender, which can't help but work in the borrower's favor.
Is It the Right Time to Buy?
Borrowers with less than stellar credit might want to consider waiting to purchase a home until they have a chance to repair their credit. Homebuyers are penalized with higher interest rates for lower credit scores, which means they pay more for their loans, and that means higher monthly payments and ultimately, a higher price tag for the home.
Not all homeowners intend to remain in their new homes for their entire lives, however, and if you're one of them, you might not gain a significant advantage by waiting until your credit improves to purchase a home. True, your monthly payments will be higher if you purchase now, but your lender may agree to offset this by extending the loan period to 40 years. You can also reduce monthly payments with a large down payment, which you'll hopefully recoup when you sell the house a few years down the road.
Even if you plan to live in the house for the rest of your life, you can always refinance the loan when your credit history improves (or if the market conditions change significantly). Missing your chance to purchase your dream home by waiting for your credit score to improve isn't always the best strategy.
Keeping Tabs of Your Credit Score
Despite the Fair Credit Reporting Act, which was passed by Congress in 1970, the credit reporting bureaus did not grant consumers easy access to their own reports in the early days of credit reporting, and there were few options for understanding your credit report let alone repairing it. Consumer protection reforms passed in subsequent years require credit bureaus to provide free reports to consumers once a year, and today, credit card companies provide 24/7 access to credit scores, so consumers can check their scores (but not necessarily their reports) whenever they want.
If you have a credit card, the easiest way to find out your score is to open an account on the credit provider's website. An increasing number of credit providers have a link to your credit score on their website, and they also supply a short explanation of the factors that determine it. Because this isn't a full report, it's still a good idea to obtain your free yearly report from each of the three credit reporting bureaus, especially if your score is lower than you think it should be.
It Pays to Build Good Credit
It's a truism that the best way to maintain a good credit score is to pay your bills on time, but it's actually more complex than that. To pay bills, you first need to have them, which means you need at least one debt, such as a mortgage or a credit card balance, to even have a credit history and a credit score. The length of time each of your credit accounts is open and how many you have also factor into the calculation of your credit score.
Assuming you don't already have outstanding debts and delinquencies or a recent bankruptcy, the recommended way to raise your credit score is to get a new credit card, make a purchase and pay off at least the minimum amount each month. If you already have one or more credit cards, don't close them but don't overdo your credit usage. Incurring too much debt in relation to your assets can send your score tumbling instead of raising it. It's also important to pay all your bills on time, including utility bills, rent payments and cell phone payments, because late payments are reported to the credit bureaus and can hurt your score, especially if they get turned over to a collection agency.
Unpaid medical bills also factor into your credit score, and you might not even know you have them. These bills sometimes arise out of disputes among medical providers and insurance companies, and consumers aren't always made aware that they owe money to the medical providers in a timely way, which can result in unpaid balances being referred to a collection agency. Fortunately, the FICO 9 formula for calculating credit scores doesn't place as much weight on unpaid medical bills as previous versions did, but you should still pay close attention to any mail you receive from your insurance company or your medical provider. Resist the temptation to disregard it; it could be important.
- Credit Karma: What You Need to Know About FICO Score 9
- Credit Karma: What Is a FICO Score?
- Experian: What Credit Score Do I Need to Buy a House?
- U.S. News & World Report: What Credit Score Do You Need to Buy a House?
- Norada Real Estate Investments: California Real Estate Market: Prices | Trends | Forecast 2021
- Zebersky Payne: 14 Consumer Protection Laws You Should Know
Chris Deziel is a contractor, builder and general fix-it pro who has been active in the construction trades for 40 years. He has degrees in science and humanities and years of teaching experience. An avid craftsman and musician, Deziel began writing on home improvement topics in 2010. He worked as an expert consultant with eHow Now and Pro Referral -- a Home Depot site. A DIYer by nature, Deziel regularly shares tips and tricks for a better home and garden at Hunker.com.