Credit Score Needed to Buy a House [Bad Credit Tips]

Buying a house is a huge step in life. It’s likely the largest loan you’ll ever take out. Also, your house is likely to be the most valuable thing that you own in your lifetime. Given that, it’s no surprise that so many people want to know what credit score they need to buy a house.

However, that question is more complex than it seems. Like any financial deal, there are a lot of factors that go into decisions about mortgages. Your credit score is one important factor, but there are other factors as well.

This article will provide the basic information you need to know if you’re thinking about buying a house. We’ll cover how credit scores work, what your credit score influences, and how your credit score relates to your ability to get a mortgage. Then we’ll look at what you can do to buy a home even if you have a bad credit score.

Use this information to get a better understanding of how credit and home buying work. Your house and your mortgage are huge investments. Understanding how to get the best deal on your mortgage can save you tens or even hundreds of thousands of dollars over the course of your mortgage. That’s money you can spend to make your house into a home.

How Credit Scores Work

Your credit score is the result of five different factors. Those factors are your length of credit history, your payment history, your credit utilization, new credit, and credit mix. We’re not going to go into too much detail on each factor, but it’s helpful to know what goes into your credit score.

There are also things that people think influence their credit score that don’t have any impact at all. These include things like your income, your debt to income ratio, and the amount of installment debt you have.

Your income isn’t reported on your credit report. That means it doesn’t influence your score. Also, because your income isn’t reported, your debt to income ratio isn’t a part of your score either. Installment debt, like personal loans, student loans, and car loans, is recorded on your report. However, the amount of debt doesn’t influence your score. Instead, these things affect your score based on your payment history. As long as you make your payments on time, these items won’t hurt your credit score.

What Your Credit Score Influences

Your credit score influences a lot of things when it comes to buying a house. The two most important things it can affect is your ability to get approval and the terms that you’re offered.

Your credit score isn’t the only thing that decides if you get approval for a mortgage. However, it does play a large role. We’ll cover more about what goes into the mortgage approval process in a bit. However, most lenders have a minimum credit score they require to even consider your application. This changes from lender to lender.

A person’s credit score also influences the terms that they’re offered on a mortgage. A higher credit score can get you a loan with a lower interest rate. That can make a huge difference in terms of how much you pay on the mortgage overall.

For example, if you want to buy a $200,000 house and are offered a mortgage at 5%, you’ll pay a bit more than $170,000 in interest over the course of the mortgage. If you can get the interest rate down by half a percent to 4.5%, then you’ll save almost $35,000 in interest charges over the course of your repayment.

Therefore, while a credit score isn’t the only factor that determines these things, it still has a huge role. That means it’s important to keep your credit score as high as possible. Doing so increases the odds that you’ll be able to get approved for a mortgage. It also increases the odds that you get favorable terms on the mortgage so that you can spend less in interest.

Credit Scores and Mortgages

Before you can understand how a credit score affects your mortgage, you need to understand some details about a mortgage. This section will help you understand what a mortgage is, the different types of mortgages, and what kind of credit score mortgage lenders look at.

What is a Mortgage?

A mortgage is a loan for a home. It’s usually the largest loan you’ll take out in your life. That means it’s vitally important to understand everything you can about mortgages. Failing to do so can cost you tens or even hundreds of thousands of dollars on payments.

Your mortgage is influenced by many things. These include your income, your credit score, and your down payment. Your income, and your debt-to-income ratio, tells the mortgage provider if they can trust that you’ll have the money you need to meet your obligations and still pay your mortgage. If your income isn’t sufficient, then you won’t be able to qualify for a mortgage. That’s because companies want to be sure that they’ll get their investment back if they lend you money.

Your credit score also tells lenders how likely you are to pay your bills on time. As a result, it helps the bank understand what kind of risk they’re taking when they lend you money for a house. The higher the perceived risk that you default, the higher the interest rate you’re offered will be. That’s because banks use a risk-reward metric when making decisions about loans. The higher the risk, the more profit the bank needs to make to justify taking the risk.

Finally, your down payment has a large effect on your mortgage approval and terms. Most banks require a minimum of 10% of the homes overall cost as a down payment. Your down payment is the amount of money you have on hand to put towards the purchase of the home. The higher the down payment, the lower the amount you’ll need for a mortgage. Also, the greater the percentage of your down payment on the home’s cost, the better the interest rates you’re offered.

Types of Mortgages

There are two main types of mortgages. The first is a conventional real estate mortgage. This is the standard type of mortgage most people think about when they’re talking about mortgages and buying a house.

Most conventional real estate mortgages come from a bank. After all, there aren’t a lot of financial institutions that have the capital on hand to make large loans like you need with a mortgage. Each bank has its own approval process and requirements. You’ll need to shop around to see what the requirements are for the different lenders on the market.

It’s also important to keep in mind that the factors discussed above can influence your ability to get approved for a conventional mortgage. If you have 50% of the home’s value as a down payment, then the bank is more likely to let things like a lower credit score or income slide. That’s because you’ll need less of a loan to buy the house. It also shows that you’re responsible when it comes to saving money. A larger down payment can also lower your interest rates, saving you a pile of cash.

The other main type of mortgage is called an FHA mortgage, or FHA loan. These types of loans are issued by the Federal Housing Administration (that’s where the FHA comes from), and they’re designed to help first-time home buyers get a home.

FHA loans have lower requirements than conventional real estate mortgages. That’s because first-time home buyers don’t have the advantage of equity built up in a previous home. As a result, they’d have a much harder time getting approved for a mortgage and saving for a down payment.

FHA loans offer a maximum financing of 97.5%. That means you only need to have 3.5% of the home’s cost as a down payment. That can make it much easier to afford a new house. This program is especially designed to help young people get a leg up and enjoy all the benefits that home ownership has to offer.

A loan backed by the FHA also has lower credit score requirements. There’s a sliding scale between what your credit score is and how much of a down payment you need to qualify for an FHA loan. For example, the lowest credit score they’ll work with is 500. However, to get an FHA loan with a 500 credit score, you’ll need a 10% down payment. If you want to get the most financing possible out of an FHA loan, then you’ll need a score of at least 580.

FICO or Vantage: What Credit Score Do Mortgages Use?

Some people don’t realize this, but there are actually a couple of different ways a credit score is calculated. Understanding the difference can help you avoid a surprise. That’s because the two scores can be similar, but any difference between them can mean a huge difference in the terms of your mortgage.

The first type of credit score is called a FICO score. This is the type of score that nearly 90% of mortgage lenders look to. Therefore, if you’re planning on buying a home, you’ll want to make sure any credit monitoring service or app you use reports your FICO score.

The other type of score is a Vantage score. Both scoring models use the same factors to determine a credit score. However, they use those factors in different ways. The important thing here is to make sure you know what your credit score is in the FICO and Vantage models. That way you can know what to expect based on which type of score your mortgage lender uses.

Credit Score Needed for a Home Loan

Generally, you need a credit score of at least 620 to buy a house with a conventional mortgage.

However, this credit score won’t get you the best deals or terms on the mortgage. Also, this minimum doesn’t apply to every lender. Banks are private companies. That means they can set their own minimum when it comes to their requirements.

You can get an FHA loan with a credit score as low as 500. However, you’ll need a 10% down payment on the house to qualify. You can qualify for an FHA loan with as little as a 3.5% down payment if your FICO score is at least 580.

It’s also important to keep in mind that banks are businesses. That means you can negotiate with them. For example, if your credit score is under 620 but you have a large down payment for the house, then the bank still might be willing to approve your application. This is harder to do if you’re just applying for mortgages online. Instead, you’ll need to go into the bank in order to talk to the loan officer directly.

Buying a House with Bad Credit

Just because you have bad credit doesn’t mean that you don’t deserve to own a home. This section will list some of the best steps to afford a home when you have bad credit. Even if your credit score is incredibly low, there are lots of options out there for you.

You can use these steps individually or in combination with each other. You can also talk to a financial planner to come up with the best strategy to put yourself in a position to be approved for a mortgage. The most important thing is to never stop trying. Patience and persistence can make home ownership a reality for you.

Increase Your Down Payment

One of the most effective ways to buy a house with bad credit is to increase the amount of money you have for a down payment. This might require careful financial planning and budgeting. It also might take a bit of time. However, the process of saving money and budgeting will also help you pay your bills on time and lower your credit utilization. These things can increase your credit score while you save for your down payment.

Increasing your down payment helps the odds of getting approved for a mortgage in two ways. First, the larger your down payment, the less loan you need to buy a home. For banks and lenders, there’s a big difference between someone that wants to buy a $200,000 home and has $100,000 on hand to put towards it and someone that only has $20,000 on hand. A greater down payment greatly lowers the risk that the lender is taking when they approve your mortgage.

Second, a larger down payment demonstrates to the bank that you’re capable of saving money and handling your finances. Banks and lenders understand that sometimes people have rough patches in life. Those rough patches can have a serious hit on your credit score. After all, most negative items on a credit report stay there for 7 years.

A larger down payment shows the lender that your credit score doesn’t accurately represent the risk you pose. After all, if your current on all of your bills and have managed to save up enough to make a larger down payment, then it’s pretty likely that you’ll be able to pay your mortgage on time.

Look for Local, State, and Federal Programs

Many people don’t think about the macroeconomic impact of buying a home. That makes sense. After all, given how big a decision it is to buy a home, most people are too absorbed in their personal finances to think about such things.

However, governments are well aware of how much of an impact home ownership has on the broader economy. Increased home ownership is one of the best ways for most people to generate wealth. They do so because they’re building equity in their home. The money you pay towards your mortgage adds value to your life, as opposed to money you pay in rent, which only enriches your landlord.

As a result, there are lots of different local, state, and federal programs designed to help people buy a home if they have bad credit or no credit at all. You should look into these programs and see what your options are. Many of them will include things like grants for down-payment assistance, mortgage guarantees to encourage banks to lend to you, and other options.

These programs can even help you buy a home if you’ve recently undergone a bankruptcy or other taken another kind of serious credit hit. Therefore, don’t let your bad credit cause you to give up on the idea of owning the home of your dreams.

Use FHA Loans if Possible

This option is usually only available to first-time home buyers. But that’s ok. Most people that already own a home can use the profit from selling their current home to get a new house or to make a large down payment on their next house.

FHA loans are designed to help people get a home even if they have bad credit. Paying a mortgage is a great way to boost your credit, so these kinds of loans can go a long way to improving someone’s overall quality of life.

The minimum credit score you need to get an FHA-backed loan is 500. More than 95% of people have a credit score of 500 or above. That means it’s extremely likely that you’ll be able to qualify for an FHA mortgage.

Additionally, if your score is lower than 500, then it’s relatively easy to boost credit score numbers. That’s because of the ways that credit scores work. They tend to push people towards the middle. For example if you have a credit score of 750, a single missed payment might lower your score as much as 80-100 points. However, if your credit score is 590, a missed payment will only bring your score down a few points.

This works the other way as well. It’s very hard to move from a score of 750 to 760. It takes a long time and a track record of on-time payments. However, being current with all of your bills for a few months and slightly lowering your credit utilization can easily move a score from 500 to 600.

Another important thing to consider with an FHA loan is how much you have for a down payment. No matter what your credit score is, you’re going to need some kind of down payment to buy a house. If you have a 500 credit score, then you’ll need a 10% down payment. Raising your credit score by 80 points can lower your down payment requirement to 3.5%.

Get a Co-Signer

Another way to get a mortgage with bad credit is to apply with a co-signer. When someone co-signs for a mortgage, they agree to be responsible for the debt if the primary borrower defaults or misses payments. As a result, this lowers the risk that you present to the lender.

It can be difficult to get someone to agree to co-sign a mortgage for you. Frequently, people get spouses, parents, siblings, and relatives to co-sign for a mortgage. It’s also important to understand how different lenders handle co-signers.

Most lenders have a special program that lets co-signers get removed from liability once the primary borrower has made a certain number of payments. This is an important point to help someone agree to co-sign for your house. After all, co-signing for something is a big decision.

Additionally, the full value of the mortgage shows up as a debt on the co-signer’s credit report until they’re removed or the debt is paid. This can limit their access to loans and lines of credit. It also means they won’t get terms that are as favorable as they would if they didn’t co-sign your loan.

If someone is asking you to co-sign on their mortgage, make sure you understand the impact this action will have. Co-signing for any financial product isn’t something that you should take lightly. However, if you trust the person asking and understand the consequences and risks, it can be an incredibly generous and helpful way to get someone you care about to the next phase of their life.

Use Credit Repair

Another option that helps many people is to use credit repair techniques. These techniques are perfectly legal and are designed to get your credit back on track so you can qualify for more loans. There are lots of different ways you can repair your credit.

One of the most common credit repair techniques is to use a secured credit card. Most people can get a secured credit card no matter what their credit score is. That’s because there’s a minimal risk to the lender for these types of products.

A secured credit card works by the borrower making a deposit for the credit limit of the card. That means if you get a secured card with a $1,000 limit, you make a deposit of $1,000. The creditor can take this money if you default on your bill. Therefore, there’s not a high risk of loss to the creditor.

You can then responsibly use this card and pay off the balance every month. That will keep your credit utilization low, which boosts your score. It also enters on-time payments onto your credit report. This also increases your score.

You can also use credit repair to make sure that all of the things on your credit report that are bringing down your score are accurate. Credit reporting agencies are staffed by people, and people make mistakes. You can dispute credit report inaccurate negative entries to get them removed from your report. As a result, your score will go up.

Refinance Later

Many people with a bad credit score can qualify for a mortgage, but the terms will be much worse than they’re willing to accept. One option is to accept the mortgage and the refinance it later. This has the benefit of using your on-time mortgage payments to boost your credit score. It’s also much easier to get approved for refinancing a house than it is to get an initial mortgage.

Refinancing can get a smart financial move for anyone, even those with excellent credit scores. You can use refinancing to lower your monthly payments, reduce your interest rate, pay your home off faster, or some combination of all three benefits.

It’s important to keep in mind that you’ll have to pay your current mortgage for some time before you can refinance. That’s because lenders want to see that you’ve established equity in the house. You can leverage this equity to get a better deal on your mortgage later.

Owner-Financed Home Sales

Another option for people with bad credit is an owner-financed home sale. These aren’t as common as normal home sales. However, they do still take place.

This is an option for people with bad credit because you just have to convince the owner that you can be trusted to pay your bills on time. The individual owner of a house doesn’t have the same overhead, profit needs, or liability that a bank has.

Additionally, owners are individuals, and it’s easier to convince an individual to trust you than a large corporation. Keep in mind that owner-financed home sales may still require a credit check. Also, the current owner of the house might still deny you because of your bad credit. However, this is another way that you can get a home without having to deal with a bank.

Rent-to-Own

Finally, you can also look for houses that are rent-to-own. These homes also aren’t as common as standard home sales. But they are generally available in every market.

A rent-to-own arrangement is similar to owner financing. You pay the current home owner a monthly rent. After a certain period of time, you have the ability to purchase the home. The rent you paid in the past counts toward the down payment on the home.

This is a great option if you can make rent payments but can’t save enough money to make a down payment on a home. It lets you translate your rent into equity. Additionally, you get all of the benefits and protections of being a renter until you buy the home.

That means the current owner will be responsible for repairs and maintenance. It also lets you be sure that you want to own the home well before you make the huge investment of buying it. Every rent-to-own set up is different. Most of these transactions are done through the home’s current owner as an individual.

However, you can also lose out with a rent-to-own option. That happens when you start renting the house with the intention of buying it and then, for whatever reason, fail to do so. That means the rent money that you would have been putting towards a down payment just becomes a standard rent payment.

If you’re doing a rent-to-own agreement, make sure your landlord agrees to report rent payments to the credit reporting agencies. These on-time payments will increase your credit score. As a result, should the worst happen you’ll have a much better credit score than you have now. This will let you look for a new home through the more traditional channels.

As you can see, your credit score plays a large role when it comes to buying a home. Unfortunately, there’s no hard answer to the question “what credit score is needed to buy a home?”. That’s because there are a lot of other factors involved. Your down payment, income, and other factors also play a role.

No matter what your credit score is, everyone deserves to have a place they can call your own. Use the information in this guide to help you negotiate the complex path to home ownership. The benefits of home ownership far outweigh the costs. You get to deduct mortgage interest from your taxes. You get to build equity in the property, which increases your overall net worth, and you get to control everything that happens on your property without needing to ask for permission.

FAQ

A low credit score is one of the biggest fears of first-time home buyers. Your credit score is one of the leading tools used to help lenders determine your likelihood to repay the loan. Not only that, but the three-digit credit score determines how much you’ll shell out over the course of the loan (which could be up to 30 years). For example, with a 620 credit core you would end up paying $65,000 more on a $200,000 mortgage than someone with a credit score of 760. Both first-time and veteran home buyers have many questions about how their credit score affects their ability to get a home loan. Some might not even realize that a simple mortgage inquiry affects their credit score. To help ease up doubts, we came up with the some of the top questions revolving your credit score and getting a mortgage.

Your Credit Score and its Role in Getting a Mortgage

Whether you’re buying a car, renting an apartment, or getting a job – the outcome can dwindle down to how the lender (or employer) views your credit score. Most conventional lenders won’t even consider handing out a loan to someone below a certain credit threshold. Fortunately, the federal government provides loans for low-credit home buyers through the Department of Housing and Urban Development. Since your credit score represents almost your entire financial background, it’s key to getting a mortgage and securing favorable interest rates.

Buying a Home with a Low Credit Score

Just because you have a low credit score doesn’t mean your doomed to never get a mortgage. There are a handful of low-credit lenders and federally-funded programs to help buyers with poor credit scores secure a loan. If you have a low credit score and plan on buying a home in the near future, the best advice is to start re-building your credit as soon as possible.

How Buying a Home Affects Your Credit Score

Your credit score is so sensitive that it can actually change just by buying a home. In most cases, your credit score will slightly drop after you buy a home. The more mortgage quotes you get, the more you credit score could drop because each quote is a “pull” on your credit report. Don’t freak out if you see a small drop in your credit score – it’s likely just temporary.

Is Your Credit Good Enough?

One of the most common questions buyers ask is whether or not their credit is good enough. While you might be able to meet the minimum credit requirement, you might end up paying a high interest rate and end up shelling out extra cash in the long-run. If you have a credit score above 500, you at least meet the bare minimum that even the most lenient lenders set forth.

Emma Higgins

Emma has been helping people improve their credit scores for the past ten years and has written a number of credit repair companies reviews for us. Prior to that, she worked as a credit repair specialist and consultant for several of the best credit repair firms. She got into the credit repair industry after graduating with a degree in Finance before getting her MBA.