Buying a house is undoubtedly one of the most exciting milestones! But, previous homeowners know and future homeowners soon find out that there’s a ton that goes into the process. Before even beginning your dream home search, it’s important to have a firm understanding of the state of your financial health. For those who plan on taking out a loan, it’s especially important to know what your credit score looks like to determine if you can qualify for a loan and how to get the lowest mortgage rate. Aside from debt, income, and savings, lenders look to your credit score as the main determinant for low rates.
If you’re already confused, fear not. We’ll explain! Before we dive into figuring out which credit score may be needed to buy a house, let’s back up and take a look at the basics so you feel ready to make an offer on the house of your dreams.
What Credit Score Is Needed to Buy a House in 2020?
The credit score needed to buy a house in 2020 varies.
If you’re not planning on putting any money down or paying cash upfront, then you’ll be taking out a pretty substantial loan for your new home. To determine if you qualify for a loan, consider using a free credit score check, as credit score is one of the most important factors in determining mortgage lending decisions. In fact, just a half a point difference in credit scores can mean tens of thousands of dollars more over the term of your loan.
Still confused? Let’s back up even more.
What Is a Home Mortgage Loan?
A home mortgage loan is used to finance the purchase of a house or real estate. It makes homeownership more accessible since the entirety of the house doesn’t have to paid up front. Home mortgage loans are typically the largest you’ll ever take out, but also typically have lower interest rates than other types. Because they’re such large amounts, they have multiple moving parts and last anywhere from 10 to 30 years. These loans are paid back in monthly payments with interest, a principle, and many other costs like property taxes, hazard insurance, or private mortgage insurance (PMI).
Home loans usually include:
- A down payment
Because these loans have much longer terms, it’s important to keep in mind how much debt you want to take on when applying. Weigh your current situation with your future plans to assess if taking out a substantial loan is feasible for your situation.
What Is the Minimum Credit Score Required for a Mortgage Loan?
Many first time home buyers are worried they won’t qualify for a loan, but that’s certainly not the case. Federal Housing Administration (FHA) loans have rather low requirements. Borrowers should have at least a credit score of 500 with a 10 percent down payment. However, this doesn’t guarantee the lender will accept. Many lenders are more prone to approve a credit score in the 500 to 600 range, so 600 might be a more realistic minimum. If your credit score falls below the 600 mark, consider attempting to raise your credit score before applying for a loan.
What Interest Rate Can I Get With My Credit Score?
Let’s say you get approved with a credit score on the lower end of the spectrum. Still, this doesn’t guarantee you’ll receive the deal you’re hoping for. Credit scores greatly affect the amount of interest you’ll pay. In a best case scenario, if you put down 10 to 20 percent, have additional savings, and an income of at least three times your total payment, here’s a breakdown of what your interest rate might look like based on your payments:
Quick Tips for Improving Your Credit Score
If you’re not happy with your current credit score and wish to improve it before setting out to buy a home, there are a few options you can consider. Just remember, fixing your credit score takes time and commitment.
Make your credit card payments. It’s important to make your minimum credit card payments on time each month. Setting up payment reminders or automatic payments can help keep you on track here.
Reduce your debt. Strive to pay down existing debts if you can. Many lenders look for a debt-to-income ratio to be below the 30 percent mark, meaning you’re not spending more than a third of your income servicing debt each month.
Review your credit report. Look this over diligently. Sometimes people find inaccurate information or missing information on their credit report history. If possible, dispute any misinformation on your report.
Once you’ve set out on the journey of purchasing a home, it’s important to get organized and collect all the information you can to assess your financial health first. Turbo offers a free credit score check that will help you determine where you stand in front of lenders. If your credit score isn’t where it needs to be, take a step back and consider making a plan to improve the number before applying for a home mortgage.