While the value of a good credit score is well established, it’s not always clear what is considered a good credit score to buy a house. That’s because lenders have different requirements in terms of credit score according to both the type of loan and the amount. Here’s what you should know about the relationship between your credit score and the types of home loans you could get.
What factors into a good credit score to buy a house?
When applying for a home loan, your Fair Isaac Corporation (FICO) score is the primary means used to determine your creditworthiness, or likelihood to repay a loan. If you don’t know your credit score, you’re entitled to check once annually for free through AnnualCreditReport.com. That way, you have a better idea of what kinds of home loans you qualify for and can even check for inaccuracies or make plans to improve your credit score.
Your credit score ranges between 300 and 850, with 300 being the lowest and 850 being the highest. The score is based on the following factors and percentages:
- Payment history: 35%
- Amount of debt owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Clearly, making on-time payments and keeping debt low are prime factors in what’s considered a good credit score to buy a house. Having an established credit history, a blend of revolving and installment credit, and few new credit obligations round out the rest of your credit score.
While having a good credit score is the chief way of determining creditworthiness, there are other factors that can influence whether a lender approves your home loan application. These factors include:
- Debt-to-income ratio
- Down payment amount
- Employment history
A debt-to-income ratio of less than 36% is ideal, and placing more than the minimum down payment (between 3.5% and 10%) increases your chances of approval as well.
How does the type of loan affect the credit score needed to buy a house?
The three primary types of home loans are conventional, Federal Housing Administration (FHA), and Veterans Administration (VA) loans. Conventional loans are the standards loans from a bank. FHA loans are insured by the government and are less risky for lenders. Finally, veterans and qualified spouses have access to VA loans. Here are the minimum credit score requirements by type of home loan:
- Conventional loan: 620 minimum credit score
- FHA loan with 3.5% down payment 580 minimum credit score
- FHA loan with 10.0% down payment: 580 minimum credit score, but may go up or down according to lender
- VA loan: No standard minimum, but it is at the discretion of lender
For the average person, as seen in the table, a credit score of 580 or more is a good credit score to buy a house.
How do I achieve a good credit score to buy a house?
If your credit score is not yet at a level to buy a house, there are ways to improve it. In the short-term, check your credit score for inaccuracies. If errors exist, you can file a dispute to have bad credit that should not be there removed.
You may also become an authorized user on a family member or friend’s account for a quick credit boost. In the long-term, you can improve your credit score by making on-time payments and paying down your existing debt.