Credit scores are subject to quite a few variables, so the one you’ll need to qualify for a mortgage and buy a house can be shifty to pin down. It depends a great deal on the type of mortgage you apply for, and on the market at the time you’re looking to buy. There isn’t one single number that guarantees acceptance, and a poor credit score doesn’t necessarily preclude you from buying.
Lenders don’t look for a single number, but rather at a range of scores. That said, 580 is a number that gets tossed about quite a bit as the minimum credit score, and that’s not a particularly good credit score. You’re in much better shape if your score is 620 or better, and The Mortgage Reports indicates that the average credit score for homebuyers was less than 750 in 2020. Capital One puts the number at 757 for the same year.
How Are Credit Scores Calculated?
You don’t have just one credit score. There’s more than one calculation system out there, although the Fair Isaac Corporation’s model, or FICO, is the one most commonly used by mortgage lenders. Your FICO score is calculated with information gathered from your credit reports from the three major credit bureaus: Experian, TransUnion and Equifax. This scoring model categorizes this information in order of importance, based on how much it influences whether a consumer is likely to repay a debt or default on it.
- 35 percent of your score is contributed by your credit history
- 30 percent is contributed by how much you owe
- 15 percent is based on how long you’ve been borrowing
- 10 percent relates to the types of loans you have outstanding
- 10 percent is based on how many new credit accounts you’ve opened recently
The resulting number will fall somewhere between bad credit and good credit, i.e., 300 and 850. The good or bad break down works out like this:
- A score of 800 to 850 is considered exceptionally good
- A score of 740 to 799 is considered very good
- A score of 670 to 739 is considered good
- A score of 580 to 669 is considered to be fair
- A score of 399 to 579 is poor
Credit in the fair range will generally get you a mortgage. Poor credit will present some problems, although it doesn’t necessarily mean the lender will show you the door.
Read More: What Is a Good Credit Score for a Home Loan?
Lenders Won’t Use Your Top Credit Score
Very few homebuyers have exceptional credit scores in the 800 to 850 range, and it's not necessary to buy a home. In fact, most lenders won’t even look at your best score.
Remember, scores are based on the information contained in three different credit reports, so you’re likely to have three somewhat different scores. Mortgage lenders use your middle score. You might have three scores of 600, 615 and 650. The lender will use the 615 number when qualifying you for a mortgage. It will use the lower of your two middle scores if you’re applying with a co-borrower, such as your spouse.
Necessary Scores Can Vary by Mortgage Type
Conventional loans require higher minimum credit scores than Federal Housing Authority, or FHA loans, and there are a couple of other loan types out there as well.
Conventional mortgage loans are uninsured. In mortgage-speak, this means that no federal agency is standing by ready to pay your loan off if you default. The bank or lending institution is on its own to try to collect from you. These mortgages fall within Fannie Mae and Freddie Mac guidelines.
An FHA loan is one where the Federal Housing Administration effectively guarantees your loan. The money doesn’t come from the FHA, but from a bank or lending institution that can rest assured it will be paid by the FHA if you default.
VA loans are backed by the Department of Veterans Affairs in the same way, but they’re only available to veterans and active service members of the U.S. Military, U.S. Military Reserves and the National Guard. Spouses of service members who died on active duty or due to a disability suffered while on active duty qualify as well.
U.S. Department of Agriculture (USDA) loans are backed by the federal government as well, but it also makes some loans available directly to consumers. These mortgages are only available for properties located in qualifying suburban or rural areas, and your income must fall below 115 percent of the median income for the area.
According to Quicken Loans, a popular and well-established lender in 2021, it breaks down like this:
- Conventional loans: 620 minimum
- FHA loans: 500 to 580 minimum
- VA loans: no minimum
- USDA loans: 620 to 680 minimum
The FHA minimums depend on how much of a down payment you’re making. You’ll need a 580 score if you're only putting down 3.5 percent, but this can drop to 500 if you can put down 10 percent. Jumbo loans for pricy real estate top the chart. They require a credit score of at least 680.
Lenders Can Override Program Minimums
These minimum FHA scores aren’t carved in stone. Remember, the FHA or VA isn’t actually giving you the money. The FHA will accept a score of 500 if you put down 10 percent, but Quicken Loans won’t. It stands firm by that 580 number. And it requires a score of at least 620 for VA loans, even though the VA has no minimum requirements.
Most private lenders follow this policy, setting their own minimum scores that can be slightly higher than what the FHA or VA requires.
Effect on the Loan
Your credit score affects more than just your ability to qualify for a mortgage loan. Lenders typically base their interest rates and other fees on a borrower’s score. You might qualify for an FHA loan with a 500 score, but you’ll pay a higher interest rate than you would have with a score of 580. Conventional loans charge the most favorable interest rates to buyers with scores over 740. The Consumer Financial Protection Bureau also indicates that mid-700 scores go hand-in-hand with the best mortgage rates.
You might also be required to come up with a heftier down payment if you have a low score. Lenders want to have some confidence that you’ll repay your mortgage debt, and they think this is more likely if you have a fair bit of your own money tied up in the property.
Other Contributing Factors
Your credit score doesn’t exist in a vacuum when you’re applying for a home loan, and that can be a good thing. Other factors can contribute to you qualifying or not qualifying if you have a mid-level score.
Banks and lending institutions will consider your income and your job security. Ideally, you’ve been at your job – or at least working in the same field – for a minimum of two years, and the longer the better.
Your debt-to-income, or DTI, ratio is typically a critical factor. How much of your income must go to repaying your existing debts? The Consumer Financial Protection Bureau says that 43 percent or less is preferred. You might not get a loan if your debt-to-income ratio is more than this percentage unless your credit score is particularly stellar. Divide the amount of your borrowed debt, including things like car payments, credit cards, student loans and personal loans, by your monthly income to determine your DTI ratio.
Read More: Debt-to-Income Ratio Requirements
Another factor is the loan-to-value, or LTV, ratio. This is the percentage of your home’s fair market value that you're financing. Divide the amount you’re borrowing by the property’s purchase price to get this one. You’ll want to come in at under 80 percent. This would be the case if you made a $35,000 down payment on a $175,000 home.
Check Your Credit Reports
What’s a would-be homebuyer to do if they have a poor-to-middling credit score and these other considerations work against them as well? Your best option might be to take a deep breath and step back for at least six months while you take some steps to bring your credit score up.
First, get your hands on all three of your credit reports. Check them for accuracy. Lenders have been known to provide the credit bureaus with misinformation. A delinquent loan that’s not yours might turn up on your report because the rightful borrower’s Social Security number is one digit different from yours. You’re entitled to one free credit report each year from each credit bureau, and Equifax is offering six free reports a year through 2026 if you contact them directly. Otherwise, just go to AnnualCreditReport.com.
Take steps to correct any mistakes that you find. Contact the credit bureau or bureaus that are reporting the errors and let them know, then reach out to the reporting lender who supplied the misinformation. Federal law requires that the credit bureau must investigate within 30 days unless your complaint is “frivolous.” They have 45 days to report back to you with the result of their investigation. You have the right to have a personal statement included with your report when it’s issued to would-be lenders if the credit bureau doesn’t agree with you that the information should be removed, stating that you’ve disputed the information and why. Your score should come up immediately when the issue is resolved.
Other Steps You Can Take
Ask a family member or close friend to add you as an authorized user to one of their credit card accounts if you have “thin” credit but not necessarily bad credit. Their hopefully ideal payment record will bring up your score if you simply don’t have much in the way of credit history. You don’t personally have to use the card, but they’ll have to trust you not to – or to at least repay them for any charges you do make.
Otherwise, the most obvious way to bring up your score is to pay down your debt and make all required payments on time. You typically have 30 days to make payments on credit cards and personal loans before the payment is considered late and is reported to the credited bureaus. You do not want to go past this deadline going forward.
Get your credit utilization ratio down. This is how much of your available credit on credit cards that you've used. Your ratio would be 75 percent if the limits on all your cards total $10,000 and your balances add up to $7,500. But don’t cancel any of your cards. Remember, part of your credit score depends on how long you’ve been borrowing. That percentage of your score will take a whack if you cancel your oldest account. The same will happen if you open any new credit accounts. Applying for and accepting new credit will lower your score, so try not to do so unless you absolutely have to.
- Quicken Loans: What Credit Score Do You Need to Buy a House in 2021?
- Rocket Mortgage: What Credit Score Do You Need to Buy a House?
- The Mortgage Reports: What Credit Score Do You Need to Buy a House?”
- Capital One: What Credit Score Is Needed to Buy a House?
- Consumer Financial Protection Bureau: FHA Loans
- Federal Trade Commission: Credit Scores
- Consumer Financial Protection Bureau: How Do I Get and Keep a Good Credit Score?
- Federal Trade Commission: Disputing Errors on Credit Reports
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.