Buying a house is an exciting milestone, but getting a mortgage to finance the purchase is challenging for some people. It can be especially devastating if your credit isn’t good enough to qualify for a mortgage.
If you’re wondering what credit score is needed to buy a house, the answer is, it depends. There are many different types of mortgage loans, and each one comes with its own credit requirements. Here’s what you need to know about the process.
What credit score is needed to buy a house?
Although there are many mortgage types, you might not qualify for all of them based on other eligibility criteria. Here’s a quick summary of the different types of mortgages and their minimum credit score requirements.
|Mortgage Type||Minimum Credit Score|
|Conventional loans backed by Fannie Mae or Freddie Mac||620|
|Veterans Affairs (VA)||None|
|Federal Housing Administration (FHA)||500|
|U.S. Department of Agriculture (USDA)||580*|
* Despite having a minimum threshold, the USDA offers a couple of exceptions to this rule. Keep reading to learn more.
Conventional loans backed by Fannie Mae or Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that buy mortgage loans from lenders so the lenders have money to offer more mortgages to homebuyers. This process helps stabilize the U.S. mortgage market and creates more opportunities for affordable homeownership.
Both GSEs have a minimum credit score of 620 for the loans they purchase from lenders. As a result, many conventional mortgage lenders have the same requirement so they’re eligible for reassignment.
Conventional loans generally don’t have any other hard-and-fast rules to qualify. In some cases, you might need a higher down payment for a home if you have a low credit score, but the minimum down payment varies by lender.
Veterans Affairs loans
Although VA loans typically are issued by traditional mortgage lenders, they don’t have a minimum credit score requirement. That’s because the VA insures the loans, limiting the lender’s risk.
But the program’s eligibility requirements make it difficult to get a loan. For starters, you must be one of the following:
- An active-duty service member
- A veteran
- An eligible spouse of a veteran
- A U.S. citizen who served in the armed forces of a government allied with the U.S. during World War II
There also are requirements for how long you’ve been in service as well as some exceptions if you have a service-connected disability. Check out the VA’s eligibility page for more details.
Additionally, the home you’re buying must be your primary residence, which means you can’t use a VA loan for a second home or an investment property.
Federal Housing Administration loans
The Federal Housing Administration insures loans made by FHA-approved lenders with affordable down payment requirements.
With a 580 credit score or higher, for example, you need to put down only 3.5 percent of the loan amount in cash. You can get approved with a 500 credit score, but you’ll need to put down 10 percent instead.
One other requirement for FHA loans is the mortgage insurance premium (MIP). The MIP is similar to private mortgage insurance on a conventional loan, but it doesn’t go away until you pay off the loan or refinance. In contrast, you can cancel private mortgage insurance once your mortgage is below 80 percent of your home value.
U.S. Department of Agriculture loans
The U.S. Department of Agriculture insures mortgage loans for people who buy homes in eligible rural areas. There are a few different loan programs from which you can choose:
- Single-family housing guaranteed
- Single-family housing direct
- Multifamily housing
Depending on which program you choose, the USDA has different property and income requirements you must meet. For all programs, however, the minimum credit score is 580, with exceptions for the following circumstances:
- Temporary situation: The circumstances that caused your credit score to not meet requirements were temporary in nature, beyond your control, and have been resolved.
- Reduced housing expense: The desired loan will reduce your monthly housing expenses by at least 50 percent, improving your ability to repay your debts.
Manually underwritten loans
Some people are in a good place financially but try to avoid using credit as much as possible. As a result, they might have a low credit score or no credit score at all.
For such situations, some lenders offer manual underwriting on their mortgage loans. For example, Churchill Mortgage offers no-score loans for people who have a solid financial foundation but no credit.
Requirements for manual underwriting might differ by lender, but some examples include:
- A good payment history with alternative credit tradelines such as rent, utilities, insurance, or child care
- A large down payment
- A stable income
- A low debt-to-income ratio
- Sufficient cash reserves
A good credit score isn’t always enough
Even if you know what credit score is needed to buy a house and yours meets the minimum, you’re not guaranteed to receive a mortgage loan. Lenders look at your full financial and credit profile to consider potential risks and compensating factors.
For example, a high income and low debt-to-income ratio can make up for a credit score that’s less than stellar. On the other hand, a recent bankruptcy or collection account can hurt your chances of getting approved, even if your credit score is higher than the minimum.
All things considered, the better your credit score is, the lower your interest rate will be. Before you apply for a mortgage, work to improve your credit by maintaining a good payment history, paying off delinquent or collection accounts, and giving your score time to catch up.
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