The Credit Score Needed to Buy a New Home

When it comes to financing a new home, credit score matters. Not only can it make the difference in whether or not you qualify for a mortgage loan program, but it can also affect how much you pay for interest, impacting your monthly payment and home finances for years to come.

Free credit score checks are readily available, but the scores they show are not likely the ones that mortgage lenders use. Credit scores are prepared by various companies, and the algorithms used to calculate them are updated at regular intervals. Scores can vary by 100 points or more, depending on the company publishing them. Mortgage lenders typically use a FICO score, version 2, 4 or 5, so these are the ones to pay attention to when home buying.

Though having the minimum required credit score is vital, working to build a higher score is helpful before buying a home. Higher scores can open the possibility of more loan programs, which may be more favorable. Plus, lower interest rates are typically provided with higher scores.

How much of a difference does interest rate make for a house payment?  For a $250,000 30-year, fixed-rate loan, a 1% interest rate can make a difference of $148 in the monthly payment, or a total of more than $53,000 difference in interest costs over the life of the loan. Not only is the cost more, but it also takes longer to build equity because more of each payment goes to interest than to principal with a higher interest rate.

And what it the required credit score for financing a home? It depends on the loan program and the lender. Here are some typical credit score guidelines for major loan programs:

Conventional loans, which are the most common, typically require a minimum of 620. Some lenders may require more.

Federal Housing Administration (FHA) loans are usually available with a 580 credit score with a 3.5% down payment. With a higher down payment, a lower score, such as a 500, may be accepted.

VA loans are available to veterans and some family members of veterans for scores as low as 500, but 580 – 650 minimums are more common.

Most lenders will accept 640 as a minimum credit score requirement for a USDA loan, which are available for borrowers with low to medium incomes in rural areas. Be aware that rural areas are sometimes suburbs of metropolitan areas. It pays to check where these loans are available before discounting them.

Jumbo loans, which are private mortgages for loan amounts above conventional limits, typically require higher credit scores. A standard minimum is 700, but this will vary by lender.

There are still home financing options for homebuyers with low credit scores. For some lenders and loan programs, as with FHA loans, a lower score may be accepted with a higher down payment, which lessens the lender’s risk. Another option is to get a co-signer – someone with established credit and a higher score. It does not have to be someone who lives in the home. Finally, it can pay to try applying with different mortgage companies, since variations occur in most programs.

For homebuyers worried about their credit scores, the most important thing is to talk to a lender – or multiple lenders – early in the home buying process. Lenders will identify appropriate programs and can also look at home finances and credit reports to help determine whether there are ways to increase credit scores quickly.

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