What credit score do you need to buy a house is it one of the most frequently asked questions we get from first-time homebuyers. You do not need perfect credit or high credit scores to qualify for a mortgage.

What Credit Score Do You Need To Buy A House: Buying Your First Home With Bad Credit

Planning to buy your own home?
It is not an easy feat. You will have to look at a number of things before you go on and decide to get yourself involved in the home buying process. But, what is the most important thing to look at when you are planning to buy yourself a house? 

What Credit Score Do You Need To Buy A House? Credit Scores Explained

The first thing you need to check when you are planning to buy a house is your credit score. If you are in a market to buy a home and you know where your credit score lies, you will be able to better understand whether you will qualify for a loan or not and the kind of interest rate you will have to pay for the mortgage loan. Loans are important and necessary for most home buyers and paying so much cash upfront is not easy. And, to get yourself a loan to buy the house you want, you will need to have a good credit score.  

What Credit Score Do You Need To Buy A House: How Hard Is It To Qualify For A Mortgage With Bad Credit

Lenders take a look at a number of factors before deciding on whether or not they want to give you a loan for your house. These factors include your income, savings, and debt. However, the biggest deciding factor when it comes to the approval of a mortgage loan is your credit score. It is so important that your loan application might be accepted or rejected based solely on your credit score. It is one of the reasons why you should regularly check your credit report to keep an eye on your overall financial health.  Before we go on and find out all about the credit score you need to buy a house, let us first talk about what a credit score is in the first place.  

Credit Score – What Is It? 

A credit score, in simple terms, is a numerical expression that represents the creditworthiness of an individual. It is based on a level analysis of a person’s credit files and the credit report information from credit bureaus. Lending institutions, such as banks, use credit scores to determine the risk posed to them by lending money to their consumers and to reduce the risk of loss in terms of bad debt.

Credit Scores Used To Qualify For A Mortgage

Lenders also use credit scores to determine who qualifies for a loan and who doesn’t. It also helps them in determining the credit limits and the interest rates to be given to the consumers.   If you want to buy a house or are looking for your options to get a loan for financing your existing mortgage, the first thing you should be doing is checking your credit score.  

Credit Score Breakdown

What is House Mortgage? 

Before we begin on our quest of finding the credit score you need to buy a house through a mortgage. Let us take a detailed look at what mortgage exactly is. A mortgage loan is a loan that is specifically used to finance the purchase of a house. This is perhaps the biggest loan you will ever take in your life and is therefore spread over multiple parts that last for around 15-30 years. A mortgage generally includes collateral, a down payment, insurance, and taxes. Thus, when you are taking a mortgage loan, it is important to keep all these things in mind to be sure you are not faced with any unpleasant surprises later on.  

The Minimum Credit Score Requirement To Qualify For A Mortgage For A Home

The minimum credit score you need to buy a home is not something set in stone. In fact, it changes quite often especially during times when the economy is in a downturn and facing recession. Lenders usually enforce stricter restrictions on borrowing money when the economy is already facing a crisis. For instance, in the wake of the housing collapse, even the applicants with credit scores of 720 above were denied mortgage loans.  Thankfully, the real estate market has dramatically improved since 2008. The lenders have also eased up a little in terms of their credit score requirements for mortgage loans. The minimum credit score requirement also depends on the specific type of loan you are applying for.  

FHA Credit Score Requirements

The lowest credit score needed for a mortgage loan by the FHA is 500. If you have a credit score of 580+, you will be needed to pay a 3.5% down payment for your loan. In case of a credit score between 500-579, the down payment will be 10%.  

How Lenders Analyze Credit Scores

When you are applying for a mortgage loan, your FICO score will be the first thing that the lenders will take into account. As mentioned before, there are many factors taken into account when you are applying for a loan, but your credit score is the most important thing that lenders check.  

Mortgages For Bad Credit

Before the housing market crash of 2007-2008, it was easier for people with a poor credit score to get their loan applications approved. They were also able to find subprime loans. Lenders were also not as heavily regulated back then as they are today. After Obama signed the Dodd-Frank Wall Street reform into law in 2010, the laws around the mortgage industry tightened up making it difficult for people with a low credit score to get mortgage loans.  

Minimum Credit Requirements for a Mortgage Loan

Everything is new for first-time home buyers. Many of them believe that they do not qualify for home loans. However, you will be happy to know that the FHA loans still have low requirements as compared to the other lending organizations.

FHA Loans For Bad Credit 

FHA offers the lowest credit requirements of any loan. Also known as bad credit home loans, the borrowers must have a credit score of at least 500 and a capacity of making a 10% down payment to insure a mortgage loan. While the requirements may be low, getting your application for a mortgage approved from FHA with such a low credit score is not an easy feat. If you have a credit score of over 580, the chances of getting your application approved increase dramatically.  

Minimum FICO Scores for Different Mortgage Types 

Below you will find a list of the typical minimum FICO scores needed to get your mortgage applications approved.  
FHA Loan:

• Credit score requirement of 580+ to qualify for FHA loans with a 3.5% down payment
• Borrowers can qualify for an FHA loan with  credit scores of 500-579 to get an FHA loan with a 10% requirement) 

VA Loans:

• There is no minimum credit scores requirement on VA loans as long as the borrower can get an approve/eligible per automated underwriting system (AUS)

USDA Loans:

• Credit score of 640+ 

FHA 203K Loan:

• A credit score of 580+ 

Conventional Loans:

• Credit score of 620+ 

Non-QM Loans:

• Depends on the individual wholesale mortgage lender

What Credit Score Do You Need To Buy A House? Minimum Credit Score Requirements On Loan Programs

When applying for a mortgage loan, the first thing to do is to check your credit score. It is easy today than ever before to check your FICO scores for free online. There are a few reputable websites that can be used to get credit reports, as well as scores, and that too for free. These websites even offer an app that alerts you if there is some change in your credit profile.  You can use these websites to check your FICO scores to find out whether you qualify for mortgage loans or not.  

What is FHA Loan? 

FHA loans are the ones that are backed by the Federal Housing Administration. Contrary to popular belief, the FHA doesn’t issue any loans. In fact, it insures them in case there is a default on the end to the borrower. This helps the borrower by reducing the credit score needed to buy the house and the risk for the lender are reduced as well. This helps people with a low credit score. You can get an FHA-backed loan if you have a credit score of at least 500 and can make a 10% down payment. However, getting a mortgage with a credit score of less than 580 is very difficult.  

What Credit Score Do You Need To Buy A House: Is it Just the Credit Score Lenders Consider?

It is becoming easier for lenders to determine whether or not the borrowers will be able to pay back their money by looking at their credit scores. One thing that can help you in this entire scenario is if you can show that there was a bad economic phase that caused a bad credit, but you have since recovered from it and gave re-established your credit.

What Credit Score Do You Need To Buy A House: Importance of Low Debt to Income Ratio 

Another factor that the lenders consider is the amount of debt you already have on you. If you don’t have a lot of debt on you, it can make for a strong compensating factor for the bad credit you have. Compensating factors are the ones that reduce the risk on the lender’s side and allow them to approve loan applications for applicants with a low credit score. Solid payment history with no collection accounts or late payments in the past 12 months can also help in the approval of your loan application.  

Here is a list of the compensating factors for bad credit

Compensating factors are taken into consideration for borrowers with higher debt to income ratios and/or bad credit. Compensating factors determine debt to income ratio caps on manual underwriting. Below are compensating factors lenders consider:

• High income 
• Low loan to value ratio 
• Reserves and history of savings 
• Low debt to income ratio 
• Job stability
• Low payment shock
• Part-time or other income seasoned for at least 12 months not used as qualified income
• Long employment history with your current employer 

Have a Bad Credit Score? Don’t Worry! 

So, you don’t meet the minimum credit score requirement to be able to get a loan for buying a house? Don’t worry. With some simple things, you can improve your credit score and can then apply again for a mortgage.  

What Credit Score Do You Need To Buy A House And How To Prepare To Qualify For A Mortgage

You will have to show the lenders some financial documents when you are applying for a mortgage loan. Therefore, it is important to keep these documents safe especially when you already have bad credit. These documents will prove that you save money, pay your bills on time and also pay your outstanding debts. If you are approaching the bank to apply for a mortgage loan, some things you should take along with is your last year’s tax returns, bank statements, pay stubs, W2s, and statements for your retirement or investment accounts. You should also make a list of your outstanding debts and the amount you are paying monthly for them.  

Using A Consider a Co-Signer To Qualify For A Mortgage

Don’t have a good credit score and enough credit history to be able to get a mortgage loan? You can also get help with a mortgage by considering a co-signer. A co-signer with a solid credit rating can help improve your chances of getting approval for your mortgage loan application. The co-signer will be taking joint responsibility for your loan and this gives the lender the security that even if you default, your co-signer will pay the loan. Just make sure you choose someone with a solid credit history to get your loan application approved. 

What Credit Score Do You Need To Buy A House: How To Apply For An FHA Loan?

As mentioned before, FHA has a low credit score requirement as compared to the other lending authorities. This mortgage loan is also insured by the federal government which allows even the people with foreclosure or bankruptcy on their credit reports to apply for mortgage loans through the FHA.  

How To Increase And Boost Your Credit Scores Prior To Applying For A Mortgage?

While raising your credit score is not something that can be done overnight, it is possible in the long run if you are working towards it through small steps. If you want to make your credit score loan worthy, it is important to make sure you keep paying your debts and bills and keep removing errors from your credit report before you go on and apply for the mortgage loan again. The lower your credit balances are, the better will be your credit score and the higher your chances of getting your mortgage loan application approved.