Your credit score is an important consideration when buying a house. It shows how you have handled debt in the past. A good credit score is a key factor in making the process more straightforward and affordable. The lower your credit score, you will be eligible for a lower mortgage interest rate.

Let’s take a look at your credit score, the best loan types for different credit scores, and how you can improve it.

Understanding Your Credit Score

Now that you know what type of loan is available, it’s time for you to look at your credit score. This means that you should look at your credit reports and know your credit score.

Credit reports are an important part of understanding credit scores. They provide information about your credit history. A mistake in your credit report can lower your score. Therefore, it is important to check your credit report at least once per year and immediately report any errors to credit reporting agencies. All three major credit reporting agencies are entitled to give you a free credit report once per year.

FICO Score Vs. Credit Score

Three national credit reporting agencies, Equifax, Experian, and TransUnion, collect information from banks, lenders, and other companies to create your credit score.

There are many ways to calculate your credit score. However, VantageScore, and FICO, are the most popular scoring models. 

These are the factors you should consider when building your score:

  • Credit history length
  • New credit accounts
  • Types of credit that you can use
  • Pay your bills on time
  • How to use your credit

Credit Score Required to Buy a House (By Loan Type).

A credit score is a number between 300 and 850 that is used to determine creditworthiness. Higher credit scores mean that more lenders are willing to work with them. Although higher credit scores are more desirable to lenders, it is still possible to obtain a mortgage even if you have less than perfect credit. It all depends on what type of loan you are applying for. Both government-backed and conventional loans require different credit scores.

Conventional Loan Requirements

Conventional loans can’t be guaranteed or backed up by government programs. These loans are best for borrowers with higher credit scores and more money to pay down the down payment. When applying for a traditional loan, it is recommended that you have a credit score of at least 620. Lenders may refuse to approve you for a loan if your credit score is lower than 620. This could lead to higher monthly payments.

USDA Loan Requirements

If you are planning to live in a rural or suburban area with a low income, and your income is below 115%, then you might consider a government-backed USDA Loan. USDA loans are available to those with a minimum credit score below 640.

VA Loan Requirements

If you are a veteran, spouse, or qualified servicemember, a government-backed VA Loan may be an option. Some mortgage providers require that you have a minimum credit score of 580 to purchase a house.

FHA Loan Requirements

An FHA loan might be a good option if you have lower credit scores or have little cash saved for down payments. This loan is insured by Federal Housing Administration. An FHA loan requires a minimum credit score of 580. A higher credit score can still be a benefit to you in order to qualify for a lower FHA mortgage rate. 

How to improve your credit score before buying a house

You can take steps to improve your credit score if you don’t think you are eligible for a loan. 

Pay Bills On Time

When evaluating your credit, a large portion of what a lender will want to see is how reliable you can pay your bills. This applies to all bills.

Don’t apply for new credit

As you build your credit, resist the temptation to apply for credit cards more often. This will result in a hard inquiry into your credit report. A lot of hard inquiries can affect your credit score.

Pay Off Outstanding Debt

You can improve your credit score by identifying any outstanding debts and making payments until they are paid. This is beneficial for two reasons. This is because if your total debt obligations decrease, you will have more room to take on. In turn, your lender will consider you less risky.

It also improves your credit utilization ratio, which is how much you have to spend relative to your total credit limit. This ratio is used by lenders to assess whether you are a safe or risky borrower. The better your credit score, the less you depend on it.

Simply divide the amount you owe on your credit card by your spending power to calculate your credit utilization. If you charge $2,000 per month on your credit card, and then divide that number by your total credit limit, $10,000, your credit utilization ratio will be 20%.

Additional Considerations when Buying a House

Lenders will consider more than your credit score when approving your mortgage application. These are just a few of the other factors lenders consider.

1. Ratio Debt-to-Income

The Debt-to-income ratio (or DTI) is the amount of your gross monthly income used to pay off debt. You can borrow more on your mortgage if you have less debt relative to your income.

Divide the amount of recurring debt (credit card, student loans, car payments, etc.) to calculate your DTI. Your monthly income is the number of recurring debts you have. 

A DTI of at least 50% is a good goal. The lower your DTI, you will have a better your chance of being offered a lower rate.

2. Ratio Loan-To-Value

LTV (loan-to-value ratio) is a measure of lenders’ risk when lending to you. It is the loan amount divided by the house’s purchase price. LTV drops as your down payment increases. LTV ratios are accepted by different lenders. However, it is best to keep your ratio below 80%. 

You may need to purchase mortgage insurance if your LTV exceeds 80%. This is dependent on the type of loan you have. Some loans, such as VA loans, may not require you to pay mortgage insurance.

3. Income and Assets

Your lender will want to see proof that you are still working. Lenders will often request proof of income and assets for two years. Your income stability could impact the interest rates that you are offered.

Credit score to buy a home

There are different credit scores that you will need to purchase a home. This depends on which type of loan you apply for. However, the better your credit score is the more likely you will get a mortgage loan. It is important to keep track of your score and review your credit reports regularly. 

Credit Repair Gal provides credit repair services for clients in Michigan. A consumer’s credit history is evaluated to determine if inaccurate, incomplete, biased, or untrue information. Negative reports can include judgments, collections, charge-offs, and foreclosure. Credit Repair Gal counsels clients about how credit scores affect their finances, such as interest rates or loans. Credit Repair Gal also offers clients a credit monitoring service during any intervention with creditors. A DIY credit repair solution is a great way to learn more about your finances.