What Credit Score Do You Need to Buy a House?

By: iTHINK Financial | Mar 30, 2023

If you are considering becoming a homeowner, one of the most important factors is your credit score or creditworthiness. In this article, we will cover how credit scores can affect the home-buying process and what steps you can take to improve your chances of getting approved for a mortgage with favorable terms.


What Should My Credit Score Be to Consider Buying a House?


Before filling out a mortgage application, checking your credit score and reviewing the report for accuracy is a good idea. If there are any errors or fraudulent activity, you must file a dispute with the credit bureaus to correct any errors. Additionally, if your score is lower than you thought or lower than it needs to be to receive a good rate, you have time to improve it, which can make a significant difference when determining the terms of your mortgage.


According to a recent report from FannieMae, the average credit score for most first-time homebuyers is 746. That said, credit score requirements for buying a house can vary somewhat depending upon the type of loan for which you are applying, as well as the lender’s specific requirements. Generally speaking, a credit score of 620 can help people obtain a conventional mortgage loan, but some lenders may require a higher score. Essentially, the higher your credit score, the better your chance of securing a beneficial interest rate and desirable loan terms.


However, prospective homebuyers have other options like government-backed Federal Housing Administration (FHA) loans or Veterans Affairs (VA) loans, for which the credit score requirements are typically more lenient. FHA loans usually have a minimum credit score requirement of 580, which is subject to change based on market conditions and other variables. VA loans, on the other hand, do not have a minimum credit score requirement, but lenders may have other minimum requirements.


While your credit score is an important factor, it’s not necessarily the only factor determining your eligibility for taking out a mortgage. Lenders also consider numerous other factors like your debt-to-income ratio, employment history, current income, and additional relevant information. Still, your chances of obtaining a more favorable loan will generally increase if you have a better credit score, and it’s never too early to start improving it.


How Can I Improve My Credit Score?

Improving and maintaining a healthy credit score can yield various benefits, but it’s essential for prospective first-time homebuyers. If you want to buy a home, having a good credit score can go a long way. Not only does your credit score determine your eligibility for a mortgage, but it also directly affects the interest rates and other terms of your loan. As such, a higher credit score can grant access to better mortgage rates, saving thousands, if not tens of thousands of dollars in interest payments throughout the life of your mortgage.


There are a number of best practices that are important to understand and master to improve your credit score. Firstly, you must pay bills on time every single month. While one or two late payments here and there won’t necessitate the destruction of civilization as we know it, they can significantly damage your credit score. Because of this, many financial institutions recommend setting up automatic payments or notification reminders to help individuals remember to may payments on time.


Secondly, it also helps to reduce existing debt. If you have high balances on credit cards or excessive, unpaid loans, these can also contribute to a lower credit score. Paying down balances and consolidating debt can slowly but surely improve your credit score.


If you are planning on buying a new home or making another large purchase in the next few years, it’s also important to regularly check your credit score. By reviewing your score, you can ensure that all the information is correct and see if any fraudulent activity could inhibit your score. Individuals are entitled to a free credit report once per calendar year from the three main credit bureaus – Equifax, Experian, and TransUnion.


Improving your credit score takes time; try your best to be patient. There are no magic wands or shortcuts for improving your credit score. All you have to do is make a consistent, concerted effort to pay bills on time, reduce your existing debt, and regularly check your score to ensure that no fraudulent activity hurts your progress.


How Does My Credit History Affect My Ability to Buy a House?

According to the Federal Reserve Bank of New York data, 768 is the median credit score in the United States for people taking out a mortgage. But many first-time buyers may not have as good of a credit score, and some may not be aware of how significantly their credit history contributes to whether or not they’re eligible for a mortgage. Your credit score is essentially a numerical representation of your creditworthiness based on your credit history.


Someone with a “good” credit history likely has a solid track record of managing finances responsibly, making timely payments, and keeping outstanding debt balances to a minimum. From the lender’s perspective, such an applicant would probably be a good candidate for a mortgage. Conversely, individuals with poor credit histories may suggest to lenders that they make late payments, default on loans, or suffer from other financial problems. Typically, lenders are much less willing to approve mortgage applications for what they consider to be “high-risk” borrowers. If they offer terms, they’re usually far less favorable than terms applicants with good credit scores receive.


If your credit score is on the lower side, or if you know your credit history isn’t great, you may still qualify for some mortgages. However, be prepared to pay a higher interest rate or make a larger down payment to offset the lender’s risk. Alternatively, it may be best for you to improve your credit score and apply again once it has improved to secure more favorable mortgage terms.


What Does the House-Buying Process Look Like?

Buying a home can be a lengthy and complex process that involves multiple steps. It’s a daunting undertaking for first-time buyers, and the entire process can vary somewhat depending on where you live and the specifics of your personal situation. Here are some of the common steps prospective homebuyers take when embarking on their journey:


      Determine your budget – Before you even start looking at properties, it’s best to understand how much you can realistically afford. Consider your current income, any outstanding debts, how much you need for a down payment, and your credit score. You can utilize online calculators and other free tools to better understand what you can afford with your finances.

      Work with a real estate agent – While some buyers may prefer to go things alone, real estate agents can help find properties that meet your criteria and provide additional guidance throughout the buying process. Real estate agents negotiate on your behalf and have ample experience helping buyers find a home.

      Begin your search – Once you’ve determined your budget and decided whether or not you want to work with a real estate agent, it’s time to start searching for houses. Agents can provide listings, and homebuyers can browse dozens of websites.

      Make an offer – After you’ve found a property that meets your criteria, it’s time to make an offer to the seller. Real estate agents may help facilitate this process, but the offer stipulates the price you will pay, any contingencies, and the proposed closing date.

      Negotiate and sign – It’s common when buying a home to experience a little back-and-forth during the negotiation stage, but once all parties agree and sign the contract, the deed is done.

      Home inspection – After the deal has been finalized, it’s best to hire a home inspector to come and examine the property for any issues or repairs that need to be addressed before the closing process can be finalized.

      Finalize the mortgage – For buyers with a mortgage, now is the time to provide your lender with financial documents like pay stubs, bank statements, tax returns, and any other information they need.

      Closing – That’s it! Homebuyers will sign a series of documents and pay any closing fees at the closing. Once the title has been transferred to you, you officially become the property owner.


Ready to Find Out How You Can Buy a Home?

By maintaining good credit habits like paying bills on time, you can consistently work towards improving your credit score and make progress towards achieving your dream of homeownership.


The higher your credit score, the better your chance of securing approval for a mortgage to buy a home. But even if your credit history is less than stellar, you can take steps to improve your score and your chances of getting into a good home. If you are considering becoming a first-time homebuyer, speak with an iTHINK Financial mortgage advisor to find out how to make your dreams a reality.