What Credit Score Do You Need To Buy A House?

Certified Mortgage Advisor
NMLS 1701021
Published 
March 16, 2019

Good and bad credit score

Now, we're going to talk about what kind of credit score do you need to purchase a home. So we're gonna talk about what bad credit is, what good credit is and what you can do to increase your credit score if you need to do so.

Misconception about bad credit

So I was talking with someone the other day and they were, they're mentioning about how they saw a client of theirs who had bad credit. And I knew what their credit score was. And I was thinking, I don't know how you're classifying this bad credit, right?

Because bad credit is a subjective term. It's hard to actually quantify what is bad credit. And so what I think happens a lot is people hear this term, they assume that since they don't have perfect credit that they must have bad credit and they won't be able to purchase a house. When in reality, that is just not true.

What is credit score?

So first let's talk about the whole spectrum of what a credit score is. So a credit score is really just a model that is taking into account how you used debt in the past.

Scoring methods

So there are different types of scoring methods. FICO is a common one that you might hear or Vantage might be a common one that you've heard. And all they're doing is just taking into account things like how much debt do you have, how often do you use it? Do you make on-time payments?

They rate your payment history and how you manage debt

They're going to give a number rating of how good you are at borrowing money. And it's confusing and it can feel really mysterious. But that spectrum normally goes down from anywhere from a three to a 400, all the way up to an 800. So they don't have hard stops. Each scoring model has different limits on what's high and low range. But there's pretty wide variability in what your score can be in and how it can land.

Where to see your credit score

So when we're considering the credit score, when purchasing a house the first place that you might look at might be somewhere like Credit Karma, or you might have a credit card that allows you to see your credit score, which is awesome.

So on there, they're using a type of scoring model that usually is going to give you a rough estimate of where your at on that spectrum. Again, is it anywhere from this very low-end range to a higher-end range and might give you some tips on how you can increase that.

Credit rating bureaus have different scoring models

Now there's always a little bit of shock. I think when people go and put an application in with a mortgage lender to apply for a mortgage and their score is a little bit lower than they thought or that they saw from somewhere like Credit Karma. That's because there are different scoring models used, but don't fear because I think a lot of people don't realize how low the credit limit actually is to purchase a home.

Credit for different types of loans

So let's talk about four different types of loans in the credit scores that you can have with them. Now, these numbers I'm about to say are not necessarily the only bottom lines. But there are, what is most common to most lenders that you'll run into. We're going to cover conventional FHA, USDA, and VA loans.

Conventional loan

For conventional loans, its bottom limit is going to be a 620 credit score. Now here's where we get into this question of what's good and what's bad credit because I know some people in this industry who would see a 620 credit score and they would say it's terrible credit, which I think is funny. Cause it's not terrible. I would say it's pretty fair.

620 is an average credit score

It's an average range for that 620, I would say if we're going to if we're going back to let's say high school if you want to understand it that way. A 620 is going to be closer to a C, right? Where you could bring that score up, but that's going to be the bottom line for a conventional loan.

FHA

Now, FHA. That's another type of loan that's insured by the government. FHA loans are fantastic. FHA is actually going to bring that from a 620 all the way down to a 580. So again, if we're going into the kind of high school grading method, I would put that at a C minus. Put that kind of near a C minus that 580 scores on the FHA.

For USDA

USDA brings the score up a little bit higher. They want to see a 640 and above.

VA

The VA loans want to see a 620 and above. So you can see there's that, that, that spectrum of a 580 to a 640 is where that lower bracket is. So those are the bottom line limits of what some of these loan programs are.

Don't just stay in the bottom

The difficult part when we run into just staying on the bottom of these different programs is that sometimes we can get higher interest rates or we have to have more reserves in the bank account, to offset that lower credit score for that loan type.

Start at 640

So really for talking about, what's good credit, what's bad credit, what's average credit. I think the best place to start is a 640. At a 640 you're going to start to see a lot better interest rates and programs with your loans at that 640 mark and above, and obviously, as you increase your credit score, you get better and better interest rates.

Credit score helps lenders

Because getting a loan is all about risk. It's all about risk for somebody else lending the money to other people, and they want to know that their money is going to be able to be paid back. The credit score helps them figure out what that looks like. If the credit score is a little bit lower, they want to see other things like a good debt-to-income ratio or some assets to offset that lower credit score.

So 640 really is going to be a fantastic place, to begin with starting to look at applying. We absolutely can do loans anywhere from a 580 all the way up to the 800 range. And we do a lot of loans that are sub 640 but you serve yourself best and you benefit the most when you have that range, that is 640 and above.

On-time payments

So if you're looking at building up credit and seeing what all of that looks like, here are a couple of quick factors of what goes into your credit score. The first thing is on-time payments. If you have any late payments any missed payments, those are going to be killer for your credit score. Those are going to tank your credit score pretty quickly.

Auto payment

So you want to make sure that you're paying on time and really the best way to do it is to set up auto payment. You do not want to miss a credit card payment, an auto payment. You don't want to miss a student loan payment. You have to be making these payments on time to increase the credit score and to keep it where you want it to be.

Utilization

So utilization is just a big word for how much that are you using, right? So let's say you had a credit card and the credit card limit is a thousand dollars. If you go and you put a hundred dollars on that credit card you have a 10%. Utilization of that credit card. You use 10% of the debt you have available to you.

Keep it below 30%

So what you'll want to do is look at how much total debt do you have available to you. Count up all your credit card limits, count all your loan limits. Have that as one big number, and then look at all the debt that you have right now. And you want to keep that number below 30%. So if your limit in debt is a thousand dollars, you want to keep your debt below $300 so that your score can stay at a decent range.

Age of account

Another factor that goes into credit is the age of accounts. So if you have nuclear. It's going to be a lot more difficult to increase your score in toget a loan for a house. If all those accounts were just started a couple of months ago.

We need at least 1 year of credit history

Normally lenders want to see about a year of credit history on those credit cards to be able to lend to. Also, that's going to increase your score as your counts, get older and older. So a nine-year-old credit card helps your credit score a lot more than a one-year-old credit card.

Opening multiple credit accounts

So one strategy, and obviously this depends on your personal situation would be to open multiple credit accounts at the same time. A couple of months ago, I went and opened four credit cards all at the same time to be able to open up that credit limit. Then I just kept them in a drawer and just use them very seldom to put on maybe for gas and then pay it off the next month.

Inquiries

Then the last factor here and then I will hop off is inquiries. So inquiries are when you have what's called a poll on your credit. So it can be a soft poll. It can be a hard pool, soft pulls won't affect your credit score. Hard pools will affect your credit score. Very marginally won't affect a lot.

What is inquiry?

But basically, an inquiry is where somebody who's willing to lend you money, a car dealership credit card company, a mortgage lender, and they're going to check your credit score. That's what hard pull is. And so those inquiries go onto your credit report. And what you want to do is make sure that those inquiries are low.

Be careful on getting a credit pull

You don't want to have within a short timeframe that you applied for three credit cards and you applied for an auto loan and you also applied for a house and you applied for some other loan over here. If you have all of those at the same time, those inquiries start to drop your credit score.

So hopefully this gives you a good recap of what credit looks like, how it affects you a little bit. And really there are a lot of options available for you. If you have a credit score within that 580 range up to that 640 range. I would start at the 640, and then continue to start increasing your credit score. You're going to save a lot of money in the long run.

What if you are in a rush to buy a home?

But if you need to get into a house as quickly as possible, maybe your lease is up or something's changed with your housing situation. It's always an option too, to say, maybe you have, let's say your credit score right now is a 580. Maybe you want to purchase the house now and then increase your credit score. And maybe two years from now, you refinance into a lower interest rate mortgage.

Create a good plan

Again, really the whole goal is to just set yourself up for success upfront and create a good plan that way when you go through the process, you're saving the most amount of money possible and it's as easy of a process as possible.

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