Credit scores can be difficult for even the most financially educated people. A high credit score improves your chances of getting a mortgage since it indicates that you're likely to pay your loan on time.

That's the reason why many lenders have minimum credit scores that they require for loans they provide. Do you know the required credit score you need to get a mortgage or purchase the house you want? Do you know that the minimum score will differ based on the kind of mortgage you're looking for? While every lender is different, knowing the range of your score and how it affects your loan application is essential.

What is the ideal credit score to buy a house?

In general, you'll require an average credit score of 680 to obtain the loan needed to purchase a house. It is the minimum credit score that lenders require for conventional loans. However, it's still possible to obtain loans with an unsatisfactory credit score and a score that is 500 or less.

If you're securing a loan on your own, the lenders take your credit score from all three credit rating agencies. They use the median or middle score to determine whether you qualify.

If there are more than two borrowers on the loan, the one with the lowest score across all clients on the mortgage is typically the qualifying score. However, there is an exception for an ordinary mortgage with several clients supported by Fannie Mae. In this case, they will average the median score of all the borrowers of the loan.

When you have an average credit score of 580 and your co-borrower has a 720 credit score, your average score will be about 650. Since the minimum score required to be eligible for a conventional loan is 620, it could represent the difference between qualifying for a mortgage application and not.

The most important thing to know is that for your mortgage rate and insurance, the score with the lowest median is the one recorded, so your rate may be a bit higher. There are some instances in which Fannie Mae still uses the lowest score to determine eligibility.

What is the minimum credit score required by mortgage loan type?

A credit score can range between 300 and 850 to show your creditworthiness. The higher your score, the more potential lenders will consider you. While higher credit scores are more favorable for lenders, it's possible to obtain a mortgage even if you have less than the ideal credit. It all depends on the kind of loan you're seeking. Conventional and government-backed loans have different requirements for credit scores.

Conventional Loan Requirements

Conventional loans can't be guaranteed and are not backed by any federal program. They're most suitable for borrowers with better credit scores and money put aside for a downpayment. It is recommended to have at least 620 credit scores or more when applying for a conventional loan. If your score falls below 620, lenders may not be able to approve your loan or could require you to pay a higher interest rate, and this could mean a more expensive monthly payment.

FHA Loan Requirements

If you have a low credit score or don't have a lot of savings to make a down payment, you may want to consider an FHA loan insured by the Federal Housing Administration. A minimum credit score of 580 is typically required. However, having a better credit score can still help you obtain the best FHA mortgage loan.

VA Loan Requirements

A government-backed VA loan could be a viable option if you're a veteran, an eligible spouse, or a qualified service member. For VA loans, there's no industry-set minimum credit score required to purchase a house.

USDA Loan Requirements

It is possible to consider a government-backed USDA loan for those who plan to reside in a qualified rural or suburban area and whose income is below 115% of the area's median income. The majority of lenders require an average credit score of 640 to get USDA loans.

How does a credit score affect mortgage rates?

Your credit score is important in determining the interest rates and payment conditions for the mortgage loan. It's because lenders utilize the risk-based pricing model when determining the loan terms.

The more you pay your bills punctually based on your credit score, the lower your interest rate may be. If your credit score isn't as stellar, you could be paying more.

Let's say you want to obtain a mortgage of $250,000 for 30 years. If you have good credit and qualify for the 4% interest rate, the monthly cost will be $1,194 (excluding homeowner's insurance, property tax, and private mortgage insurance). You'd be paying $179,674 in interest throughout the loan.

However, if your credit requires some improvement and you are eligible for a 5% interest rate, this will raise your monthly payments to $1,342 and the total interest cost to $233,140 - a difference of $57,466.

What other factors do mortgage lenders consider?

Your credit score is a major aspect in determining whether you are eligible for a mortgage. However, it's not only the primary one that lenders consider.

Income: Lenders will also look at your earnings. They want to know if you have enough cash monthly to cover the payments.

Debt-to-income ratio:  The lenders also consider your monthly debts. Lenders vary, but they will generally require your total monthly debts including the estimated loan payment to be less than 43% of the total monthly income. If your debt-to-income ratio is higher, you might be unable to get a mortgage.

 

Down payment: The bigger your down payment , the higher the chance you will qualify for a mortgage and a lower interest rate. Lenders believe you're less likely to cease making payments if you've already invested a huge amount in the loan. A higher down payment makes loans less risky to lenders.  

 

Savings:  They want to ensure that you have the funds to pay your mortgage should your income suddenly decrease. Due to this, they will require that you have enough funds saved to cover a minimum of 2 months' worth of mortgage payments.

 

Employment history:  Lenders vary, but they typically want to know that you've been working at the same place or in the same industry for a minimum of 2 years. They believe that you're less likely to lose your job and that your income will be more stable if you've established extended work history.  

It's necessary to improve your credit score before you apply for a loan. Don't take the risk of overlooking the other aspects of your financial standing.

What are the factors affecting a credit score?

It is important to understand the credit score and the factors that affect it before you can begin getting a mortgage. Once you've mastered this knowledge, you can improve your credit score or maintain it to increase your chance of qualifying for a mortgage.

A commonly used score that mortgage lenders use to evaluate your creditworthiness is the FICO Score  (created by the Fair Isaac Corporation). The FICO Scores aid the lenders to calculate the interest rate and the fees you'll have to pay for your mortgage.

Even though the FICO Score is a significant factor during the process of obtaining a mortgage, banks consider a variety of factors that include your income, type of property assets, and debt levels to determine whether or not to grant you a loan. It is why there's no exact credit score that you must meet to qualify for a loan.

Although the exact scoring model may differ from lender to lender, variations of the FICO Score are usually used as a starting point. It takes several variables from the credit reports including the ones listed below from the three main Credit Bureaus (Equifaxs, Experians , and TransUnions) to calculate your score. The FICO Scores can range from 300-850.

From this data, they calculate an overall score based on the following:

• Payment history
• Amount owed
• Length of credit history
• Credit types
• New credit

The better your score, the more likely you'll get a lower interest rate on a mortgage.

How can you increase your credit score before buying a house?

If you're trying to get approved for a loan, here are some effective ways to improve your credit score.

Pay off outstanding debt.

One of the most effective methods to improve your score on credit is to determine any outstanding debt you have and fully pay off the debt.

Pay bills on time.

A significant portion of what a lender would like to determine when they review your credit score is the reliability with which you can pay the bills. It applies to all charges and not just mortgages or auto loans. Cellphones and utility bills are equally important.

Avoid applying for too much credit.

Do not allow yourself to sign up for additional credit cards while you attempt to improve your credit score, as this will create the possibility of a hard check on the credit score. Many hard inquiries could negatively impact your credit score.

The Bottom Line

A mortgage is a long-term investment. However, getting into a house with less-than-perfect terms may still be a good idea in certain circumstances.

If you are in a location where the cost of a mortgage will be less than the amount you pay for rent, for instance, even a loan with a higher interest rate can help you save money in the short run. If owning the home you live in improves the quality of your life overall, it could be worth paying more.

The credit score needed for buying a home varies according to the kind of loan you're seeking. However, the higher your score, the easier it will be to secure a fantastic mortgage loan. The trick is to keep track of your score and check your credit report regularly.

Whatever you decide to do, ensure that you get your credit score in order before applying. Keep an eye on your credit after purchasing to maintain a good credit score.