What Is A Good Credit Score To Buy A House?
It pays to understand how your credit score impacts the purchase of a house before you throw yourself into the deep end of the real estate market. Your credit score plays a major part in buying a house.
The score is derived from a complex mathematical model which statistically delivers lenders an answer to the question: what is the likelihood that this borrower will repay the loan? Based on that answer, lenders determine interest rates, terms, and whether or not you will be granted the mortgage.
Before we go any further, let’s take a look at some credit score basics.
What is a Credit Score?
Lenders want to know what risk is involved before they approve a mortgage. The primary tool they use is a credit report. One element of that report is your credit score. There are three credit bureaus which report scores in the USA: Equifax, Experian, and Transunion (You visit our page for credit bureau contact info). It is possible, due to slight variances in calculation between the bureaus, that you will have three different credit scores. The scores shouldn’t vary drastically. If they are, get copies of your credit reports, do some investigative work, and find out why.
What Affects a Credit Score?
The credit bureaus obviously take into account your previous payment history, and how long you’ve had a credit. You may have a perfect payment record but, if you’re new to the credit world, your score may still be low because you don’t have a long credit history.
Credit bureaus also consider several other factors such as:
- Current Level of Debt
- Type of Credit on Your Report
- How Many Accounts are Active on Your Report
- New Accounts That Have Recently Been Opened
- Number of Recent Credit Check
In fact, any activity in your credit history will affect the credit score. Be particularly aware that the number of credit checks will affect your credit score, which means if you’re shopping around for mortgages, every time somebody checks your credit… your score will drop.
What is a Good or Bad Credit Score?
When determining what is considered a good or bad credit score, you can use this as a general guideline:
|Credit Score Rating||Credit Score Points|
|Excellent Credit||781 – 850|
|Bad Credit||below 500|
Credit scores range between 300 and 850. Higher is better. The number is called a FICO score. FICO is an acronym for Fair Isaac Corporation. They developed the mathematical model upon which the score is calculated.
It’s important to keep in mind when considering what a good or bad credit score is because different lenders have different requirements. This is certainly true if you find your credit score hovering in the midrange. One lender may accept 680; while another may only accept 720.
How Does Credit Affect Mortgage Rates?
Your credit score is arguably the most important element, not only in helping you secure a low-interest rate but in securing a mortgage at all. If your score is high, it is more likely that you will be offered an attractive interest rate. This puts you in a good position because banks often compete to attract low-risk borrowers.
If your credit score is mid-range, or on the low side, you’re going to have to pay a higher interest rate.
What Credit Score Do I Need To Buy A House?
A credit score of 740 and higher typically means that you will be offered the best interest rates. However, even if your score is high, that doesn’t guarantee you’ll get a mortgage. The lender will also consider other elements such as your employment history, your credit-to-debt ratio, and whether or not you have diversified credit (different types) of credit on your report.
What is the Lowest Credit Score to Buy a House?
New regulations require you to have a minimum FICO score of 580 to be approved for an FHA loan with the proviso that the borrower put down 10% of the purchase price. VA loans, available primarily for qualified military, veterans, and surviving spouses, will sometimes deal with credit scores as low as 620 but recommend at least 680.
If You Have a Low Credit Score, What are the Potential Dangers of Taking out a Mortgage?
Instead of thinking of your credit score as something that is used against you, think of it as something that will help you answer your own questions and figure out how best to move forward. For instance, having a low credit score makes it difficult to get a loan, but it also is a very good indicator that you will struggle to make the payments on a mortgage. Think ahead before you put yourself in financial danger. Let’s have a look at some real-time figures to see how your credit score will affect you long after you sign on the dotted line.
So, you’ve got your mortgage. You’ve locked in an interest rate. For the sake of this example, and no – all situations won’t be this clear cut, but for illustration only – let’s go with these figures:
According to the United States Census Bureau the national average house sale price in the United States in February 2015 was $341,000. Considering current FICO credit rating levels and interests rates the following will show how varying credit scores will affect your monthly payment:
(For scores above 620, APRs assume mortgage with 1.0 points/80% Loan-to-Value Ratio. For scores below 620, APRs assume mortgage with 0 points/60-80% Loan-to-Value Ratio. Assumes single family, owner-occupied property.)
At the time of writing this article, considering the House Price National Average $341,000 / 30-Year Fixed Loan.
|Credit Score||APR||Fixed Term In Years||Mortgage Per Month|
|760 - 850||3.759%||30||$1,581|
|700 - 759||3.981%||30||$1,624|
|680 - 699||4.158%||30||$1,659|
|660 - 679||4.372%||30||$1,702|
|640 - 659||4.802%||30||$1,790|
|620 - 639||5.348%||30||$1,904|
Just looking at the differences in the Best Credit Score and the Worst Credit Score, we can see the following in this example: if you have a credit score of 620 – 639 you will pay $323 more a month; $3,876 more a year; and $116,280 more in interest over the life of the mortgage.
How To Improve My Credit Score Before Buying a House?
It takes time to improve bad credit, but it isn’t impossible. There are several things you can do to improve your credit score before you purchase a house.
- Bring all your past-due accounts up to date.
- Pay all your over-the-limit accounts down to the acceptable limits.
- Pay your bills on time.
- Set yourself a goal to pay all your credit cards down to at least 25% of the max limit.
- Resist the temptation to open new lines of credit.
- Although it seems counterintuitive, don’t close your credit cards.
- Pay off all those ‘small’ balances. If you have many cards with small balances, pay them off.
- If you have several credit cards, pick one or two go to cards and work to pay the rest off.
- Clean up your credit report. Do what you can to remove signs of old bad debt but remember – leave the old good debt as long as you can because it is a sign that you have a good, long credit history.
- Think of your credit as a long-term project. Healthy credit is much like a healthy diet. It needs to become a way of life rather than simply spot focusing on it for acute periods of time and then forgetting about it.
Tips to Buy a House and Increase Your Credit Score
Ironically enough, one way to improve your credit score is to take out a mortgage. A mortgage is considered good debt because it is associated with a valuable asset. It is also considered an installment debt vs revolving debt of credit cards. Diversifying the kinds of credit on your report will improve your credit score. Also, a history of making payments on time has a significant impact on your score.
Now that you understand how important your credit score is in getting a mortgage and a competitive interest rate, it’s up to you to go out there and shop around for the best lender for your needs. If you’ve decided that your credit score needs some work before you buy a house, that’s great too. Think of it as an adventure and use the time to dream and plan exactly what you’ll do once that dream house is yours.