What is A Good Credit Score for Buying a House?

What is a good credit score for buying a house

The author of this post is Catey Hill, a writer for the real estate website Zillow.com.

Have you ever wondered what is a good credit score for buying a house? If so, you’re not alone. Many buyers are entering the housing market right now to take advantage of current low mortgage rates, some of which are even below 3 percent. But before you decide to buy a house, you need to not only figure out if you’re financially ready but also make sure that your credit score is in good shape, especially if you want to qualify for the lowest interest rates.

While many people think that an additional percentage point or two on their interest rate won’t make much of a difference, it does. Consider this comparison: Consumers who borrow $200,000 over 30 years at a 5 percent rate pay more than $186,000 in interest to the bank over the life of the loan. Compare this to consumers who borrow the same amount over that same time period but at a 3 percent rate pay just over $103,000 in interest – that’s more than 40 percent less.

Plus, a lower interest rate can significantly lower monthly mortgage payments, freeing up cash for homeowners each and every month.

That’s why it’s essential for home buyers to know their credit scores and restore their scores before applying for home loans. Here’s what potential home buyers need to know about credit scores.

What is a “good” credit score?

Credit scores range from 300 (poor) to 850 (excellent). Credit scores are calculated by looking at the following five factors:

  1. Past payment history (35 percent of a score is determined by this; the more bills consumers pay on time, the better their score).
  2. Amounts owed (30 percent; consumers who have used up a large percentage of their available credit will likely have lower scores).
  3. Length of time a consumer has had credit (15 percent; a longer credit history tends to be better)
  4. New credit (10 percent; consumer who open up a lot of new credit at once may hurt their scores)
  5. Type of credit (10 percent; a variety of different types of credit like installment loans, credit cards and retail accounts tend to boost credit scores)

In general, the higher a consumer’s credit score, the lower the interest rate he or she will get, though other factors besides the credit score — like down payments (20 percent of the home price or more is preferable) — are used when determining interest rates.

Keep in mind that there are several different credit scores and your lender will likely use the credit score that is specifically geared toward mortgage loans.

What kind of credit score do you need to buy a house?

While it used to be that consumers with a credit score of 720 or above could qualify for the best rates, these days consumers will likely need a credit score of 740 or above.  A credit score of 620 is typically the minimum score that lenders require to give out conventional home loans (most people get a conventional loan; these loans can be obtained from almost any bank or mortgage company and aren’t backed by the government). People with scores in the 600s may pay a percentage point or more in interest than those with higher credit scores.

Fannie Mae, a government-sponsored entity, requires a minimum score of 620 (though many Fannie Mae loans require a 660), and the Federal Housing Authority (FHA) — a government agency offering loans with a low interest rate and down payment — requires a minimum score of 580. But still, a score above 740 is the best credit score for buying a house.

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How can consumers find out their credit score?

Consumers should find out their credit scores before they apply for a loan: This way, they can take the necessary steps to raise their scores and thus get the lowest rates possible. Aspiring home buyers should visit AnnualCreditReport.com to get a free copy of their credit reports from all three of the major credit bureaus (Experian, TransUnion and Equifax). The credit reports contain the information that your credit scores are based on. Keep in mind that each bureau may have slightly different information on file for you and may have a different credit score for you. Make sure that all the information on the reports is accurate; if it isn’t, go online to the credit bureau’s website to figure out how to dispute the inaccurate information.

In order to get your actual credit score you can sign up for ReadyForZero. Or you can use a website like CreditKarma.com which gives you one of your three credit scores for free.

How can consumers raise their credit score?

If a consumer finds that everything is correct on his or her credit report, but the score is still less than stellar, there are steps to take to boost the score. Because the bulk of a credit score is determined by payment history and amounts owed, consumers can improve their scores by making sure they pay their bills on time going forward (consumers may want to set up automatic reminders or automatic bill pay with a bank to ensure they don’t forget to pay on time again) and by paying down large debts like credit card bills, especially if these credit cards are nearly maxed out. Plus, consumers should refrain from taking out a bunch of new credit lines at once. These tips will help you improve your credit score.

Hopefully this post has helped to answer the question “What is a good credit score for buying a house?” But don’t try to buy a house just because of low interest rates or any other market trends. Especially if you are working to pay off debt and need time to save up money, then it may not make sense for you to buy a home. For those that do want to, proceed cautiously and keep this information about how credit scores affect the house-buying process in the forefront of your mind.

Image credit: iriana88w

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  • E

    “Aspiring home buyers should visit AnnualCreditReport.com to get a free copy of their credit scores and request a report from all three credit bureaus…”

    Last I checked, you could only get your credit reports free not your credit score. Did something change?

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      You are absolutely right! Thanks for catching that. I’ve now fixed the post to reflect that.

  • Edward

    Just and FYI…..the “scores” that you will receive from the 3 bureaus are deceptive. Housing lenders use a risk based score which is entirely different. On 5/31 I pulled my OWN Equifax score, 2 hours later a lender pulled it from Equifax and it was 103 POINTS lower. Needless to say this is a huge issue.