Are you thinking of buying a house, but don’t know what credit score is needed? Well, you’re not alone.
According to a recent study by GoBankingRates, more than 35% of Americans don’t know their credit scores.
And even more importantly, nearly 40% of millennials (ages 18-34) are unaware that their credit score could impact their ability to buy a home.
With so many people in the dark about this important topic, we thought it was time to shed some light on the subject.
Keep reading to learn everything you need to know about what credit score is needed to buy a house with no money down.
What Credit Score Do You Need To Buy a House?
The minimum credit score required to buy a house is 620.
Although according to Fannie Mae, the credit score of first-time home buyers is 746, you may qualify for a mortgage with a lower score if you are looking to take out an FHA, VA, or USDA loan.
How Is a Credit Score Calculated?
The three national credit reporting agencies – Equifax®, Experian™, and TransUnion® – collect information from lenders, banks, and other companies.
This information is compiled to form your credit report, which contains details about your payment history, the length of your credit history, types of credit, and amounts owed (among other things).
The scoring models use this data to calculate a score based on a scale that ranges from 300 to 850 for FICO® Score models or 300 to 850 for VantageScore® 3.0 models (which matches the FICO® model).
Lenders can use this score to determine whether or not they qualify for loans or other financial products with better rates than those without a good score.
How To Improve Your Credit Score Before Applying for a Mortgage
Step 1: Check Your Credit Score and Reports
Checking your credit score and reports can help improve your credit score before applying for a mortgage. By checking your report regularly, you can identify any errors or inaccuracies and take the necessary steps to correct them.
👉 Check your credit score for free
Additionally, reviewing your payment history will help you understand how important on-time payments are when it comes to improving your score.
By checking your credit report and score regularly, you’ll be able to identify any areas where improvement is needed and take action to correct them quickly.
This will ensure that when you apply for a mortgage loan in the future, you’ll have an improved chance of getting approved with favorable terms or no denial at all due to an improved credit score.
Step 2: Ask for Loans From Multiple Lenders
Asking for loans from multiple lenders can help improve your credit score before applying for a mortgage.
This is because each time you apply for a loan, the lender will evaluate your credit history and determine your creditworthiness based on factors such as payment history, debt levels, and other financial indicators.
By asking for multiple loans from different lenders over time, you will build up a more comprehensive picture of your overall creditworthiness which can help improve your score.
Additionally, making on-time payments on all of these different loans will also strengthen your record of repayment and show lenders that you are responsible for money management.
Step 3: Get a Co-Signer
Getting a co-signer can help improve your credit score before applying for a mortgage by providing additional joint responsibility for the mortgage.
This helps to demonstrate to lenders that you have support from someone who is willing to share ownership of the home.
By having a co-signer on board, it can help improve your credit score because it shows that you have someone who is willing to stand by you and be responsible for repaying the mortgage loan together if needed.
This can help increase your creditworthiness and make it easier for you to qualify for a mortgage in the future.
Step 4: Pay Down Debt
Paying down debt can improve your credit score before applying for a mortgage because it lowers your debt-to-income ratio and reduces the amount of credit card debt you have.
This can lead to a better credit utilization rate, which is an important factor in determining your credit score. By paying down high balances, you could see an improvement in your score quickly.
Read more: What Is a Good Credit Score?
Step 5: Avoid Applying for New Credit
Resist the urge to apply for more credit cards and other loans.
Avoid applying for new credit if your credit report includes significant negative items such as bankruptcy, collection accounts, or repossession.
Wait until you can build a more positive credit history before applying for a large loan when the housing market is hot or interest rates are rising/falling respectively.
Step 6: Get a Higher Credit Score
Check your credit report for free once every week with all three major credit bureaus (TransUnion, Equifax, and Experian).
If you find errors on any of your reports, dispute them with the credit bureau as well as with the lender or credit card company.
Use a free credit score monitoring tool like Credit Karma or Credit Sesame to track progress over time and see what actions affect your score most significantly.
Pay down credit card balances to reduce your credit utilization rate and avoid applying for any new forms of credit during the months leading up to a mortgage application.
Pay bills on time each month; this will have the biggest influence on your score so make sure it’s consistent over time.
Seeking credit counseling from a reputable agency can be a valuable tool for improving your credit score by helping you develop a budget, manage debt, and improve your credit habits. Look for agencies accredited by the NFCC or FCAA.
Read more: Get Help With Bills
Step 7: Consider Waiting
Review your credit report to determine if there are any significant negative items, such as bankruptcy, collection account, or repossession.
If there are significant negative items on your credit report, wait until you can build a more positive credit history before applying for a mortgage loan.
This may take several months or even years depending on the severity of the items on your report.
When the housing market is hot or interest rates are rising, it may be wise to wait until things cool off or rates drop again before applying for a mortgage loan in order to get the best terms possible in terms of rate and fees associated with it respectively.
Step 8: Try for a Mortgage With a Higher Limit
Determine if you qualify for a jumbo loan. The Federal Housing Finance Agency (FHFA) sets conforming loan limits based on the area you live in, with a minimum of $715,000 and a maximum of $1,073,000.
You’ll need to have a low debt-to-income ratio and a high credit score to be approved for one of these loans.
Figure out how much money you need for your mortgage by calculating your budget and researching local prices for homes or apartments that fit within your budget range.
Gather the required cash reserves needed by lenders for jumbo mortgages by adding up all sources of income plus any additional savings or investments you have available to use towards the down payment or closing costs associated with buying a home or apartment.
Apply for an online mortgage calculator that can help determine what type of mortgage would work best given your financial situation and desired loan amount.
This will also help calculate how much interest rate will be charged on any given mortgage type if applicable.
Step 9: Opt for a Conventional Loan instead of a mortgage loan with other terms
When choosing a mortgage loan, it is important to consider the types of rates and terms available. A conventional loan is offered by private lenders and typically requires a FICO score of 620 or above.
Read more: Conventional Mortgage Loans
You can choose from terms that include 10, 15, 20, or 30 years with this type of loan. Additionally, conventional loans require larger down payments than government-backed loans ranging from 5% to 20%.
With a conventional loan, you could eliminate some extra fees associated with other types of mortgages due to the larger down payment requirement.
Step 10: Assess Your Debt-To-Income Ratio
Your debt-to-income ratio is one of the most important factors lenders will consider when you apply for a mortgage.
This ratio is a measure of how much of your income goes towards paying down your debts each month, and it provides lenders with a good indication of your ability to repay a loan.
The ideal debt-to-income ratio is 36%, but anything below 43% is still considered to be good. To calculate your debt-to-income ratio, add together your debt every month and divide it by your income.
For example, if your monthly debt payments total $1,500 and your gross monthly income is $4,000, your debt-to-income ratio would be 37.5%.
Tip: Consider Renting Instead of Buying a Home
Renting instead of buying a home can improve your credit score by showing lenders that you are able to manage and pay off debt on time.
By renting instead of buying, you can show that you have a steady income and are capable of making timely payments on any debts you may have.
This will help increase your credit score over time as long as your payments are made on time each month.
Conclusion
If you’re thinking of buying a house, the first step is to check your credit score and make sure it’s in good shape. Your credit score is one of the most important factors in determining whether or not you’ll be approved for a mortgage loan.
Once you know your credit score, you can start shopping for a home that fits your budget and begin the process of buying a house.
FAQs
What is the minimum credit score required to buy a house?
The minimum credit score required to buy a house is 620.
However, you may qualify for a mortgage with a lower score if you are seeking an FHA, VA, or USDA loan. A higher credit score of 760 and above is likely to get you the best interest rate on a mortgage.
What is the maximum loan eligibility based on credit score?
The maximum loan amount varies based on the borrower’s credit score.
For conventional mortgages, the minimum credit score required is 680 and the maximum loan amount generally depends on factors such as income, down payment, and overall financial situation.
For jumbo loans, which exceed maximum loan amount limits set by the Federal Housing Finance Agency, borrowers need to have a minimum credit score of 680 in order to qualify for these riskier loans.
What Is the median credit score to buy a house?
According to the Federal Reserve Bank of New York data, the median credit score for those who took out a home loan in 2022 was 768. This means that half of all borrowers had a higher credit score than this, while half had a lower score.
The best credit score to buy a house is 760+. This may also get you better mortgage rates, especially since more lenders require a minimum score of 620.
What factors do lenders consider when evaluating a borrower’s credit score?
When evaluating a borrower’s credit score, lenders will consider factors such as:
- Down payment amount
- Income and employment history
- Debt-to-income ratio
- Last 2 years of tax returns
- Bank statements
- The condition and value of the home being purchased
What is the debt-to-income ratio and how does it affect loan eligibility?
The debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward paying off debt. It is calculated by dividing the amount of recurring debt you have by your monthly income.
Having a low DTI can be an advantage when applying for a mortgage loan, as it indicates that you have less debt in relation to your income and are therefore less risky to the lender.
Low DTIs generally lead to lower mortgage interest rates, so it’s essential to aim for a DTI of 50% or lower.
The front-end ratio refers to how much of your monthly gross income goes towards housing expenses, while the back-end ratio takes into account all sources of recurring debts including credit cards and student loans in addition to housing expenses.
By understanding both ratios lenders can determine how much you can afford based on your overall financial situation and risk profile.
What Is a back-end ratio and how does it affect loan eligibility?
Your front-end ratio is a measure of how much of your gross income (income before tax) goes towards house payments, whereas the back-end ratio is the amount of your gross income you spend on other debt payments, like credit cards, car loans, student loans, and so on.
The back-end ratio is used in conjunction with the front-end ratio to give lenders a better understanding of the borrower’s financial situation.
Generally speaking, most lenders will not approve a mortgage loan if the total debts including the proposed mortgage are more than 36% of your gross monthly income. This is also your debt-to-income ratio.
To calculate this number you must multiply your annual salary by 0.36% and then divide it by 12 to get your monthly payments toward debts each month.
What Is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?
Both fixed-rate and adjustable-rate mortgages have interest rates that vary.
The interest rate on a fixed-rate loan will never change, while the rate on an adjustable-rate mortgage may increase or decrease annually based on an index plus a margin.
Fixed-rate mortgages are ideal for buyers who want to stay where they are for many years, whereas adjustable-rate mortgages are better suited for those who want a low payment but don’t plan on staying in the home for the long term.
Additionally, ARMs are riskier as their rates may go up if the economy falters whereas with fixed-rate loans there is no risk of this happening.
Sources
- Yahoo! Financeaccessed on February 23, 2023
- Federal Reserve Bank of New Yorkaccessed on March 6, 2023
- Fannie Maeaccessed on March 6, 2023
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