Credit score Q&A: “What credit score is needed to buy a home?”
Home prices have fallen a ton over the past few years, along with mortgage rates. In fact, interest rates are at record lows at the moment.
That must mean it’s a good time to buy a home, right? Ha ha…well that’s a discussion for another day, but we can touch on the credit scoring requirements regardless.
You Don’t Need a Credit Score
First off, you don’t need a credit score to buy a home. What? That’s right. If you happen to have a good chunk of cash, you don’t need a credit score. You just buy the house outright and you’re done.
A home loan isn’t necessary if you pay in cash, or make some other arrangement that doesn’t rely on credit scoring. The seller may also offer a deal that doesn’t require the use of a credit score.
Okay, okay, you’re not in that elite group and the seller isn’t having it, we get it. So what credit score do you need to get a mortgage, you ask?
Well, it depends. The absolute minimum credit score for FHA loans, which cater to less creditworthy and low-income borrowers, is 500.
Yep, with a 500 credit score, which I consider a terrible credit score, you can buy a home.
Of course, you’ll need other supporting factors, such as a job, steady income and assets to back up that purchase, but it is (supposedly) possible.
For conventional loans, you’re looking at a minimum credit score of 620 for the most part. If your credit score is below 620, the pricing hits will be so substantial that you likely won’t qualify anyways.
In other words, if your credit score is that low, you’ll pay an interest rate maybe five percentage points higher than those with good credit scores. And you’ll need to bring in a larger down payment, perhaps 10-20% minimum.
So even if you “can buy a home,” it probably wouldn’t make a lot of sense financially.
What About A Good Credit Score?
Let’s switch gears and talk about the benefits of having a good credit score when it comes to home loan financing.
If your credit score is 740 or above, you’ll typically receive the best pricing and fewest adjustments to rate, meaning you’ll actually be able to get those low rates you see on TV.
Clearly this is optimal, as you wouldn’t want an average credit score to raise your interest rate one or two points. That could translate to hundreds of dollars per month, just because you didn’t take good care of your credit.
So both a good credit score and a bad credit score have the potential to move your interest rate significantly.
Check Those Scores!
This explains why experts urge prospective homeowners to check their credit scores long before applying for a home loan.
In fact, a few months prior to application is probably best practice, as it make take a few months to clear up any derogatory accounts, medical collections, mistakes, maxed out accounts, and so forth.
During this time, it’s also imperative that you don’t apply for any new credit or make significant charges on your existing accounts, as doing so can damage your credit score, at least temporarily.
In summary, while a credit score alone isn’t enough to qualify for a home loan, it is one of the most important factors, so be sure that your score is in top shape before even thinking about financing a home.
Read more: How to improve your credit score.