What credit score do you need to buy a house?

There’s a lot to think about when buying a home between getting funding for a down payment and closing costs, making the winning offer, and gathering documents to give the lender. It’s important not to overlook your credit score. Lenders look at your history to determine the likelihood you’ll be able to handle your payments. We’ll look not only at the credit score needed for a mortgage, but how to get the best rates.

What is a good credit score to buy a house?

Credit scores range from 300 – 850. To qualify for a home loan, most lenders require a score of 580 – 620, depending on the loan type. Some lenders may allow you to qualify with a score as low as 500, but scores at the higher end will bring with them more options and lower interest rates. Here are some baseline ranges you can use to put your score into perspective:

Of course, your credit score isn’t the only thing lenders evaluate. We’ll talk later about factors like debt-to-income ratio (DTI) and loan-to-value ratio (LTV). There’s some interplay between these and the credit score you need to qualify.

Credit score needed to buy a house by loan type

While you want to aim for the highest credit score possible for the best terms, having a target when you’re buying a home helps focus your efforts and planning. The requirement depends on the type of loan you’re applying for. Here are the common requirements for conventional and government-backed loans.

You might notice that credit score minimums for Rocket Mortgage are sometimes higher than the agency minimum. Lending to someone who has a credit score below 580 is known as subprime lending and can leave the borrower with higher interest rates. Instead, we want to give you the tools to strengthen your credit so you qualify for a more affordable loan in the future.

How do lenders determine your credit score?

It’s one thing to know where you should be headed with your credit score, but that’s not the end of the complications. There are three major credit bureaus that have different data and report different scores on you – Equifax^®, Experian™, and TransUnion^®. They also use three different FICO^® Score models between them:

• Experian™/Fair Isaac Risk Model v2
• Equifax^® Beacon 5
• TransUnion^® FICO^® Risk Score 04

Although no date has been finalized for implementation, the Federal Housing Finance Agency announced plans to move the industry to FICO^® 10 T and VantageScore^® 4.0.

Lenders use your median score

If you’re applying for a loan on your own, lenders get your credit score from each of the three major credit rating agencies. They’ll then use the middle or median score to qualify you for a home loan. If there are two or more borrowers on a mortgage loan, the lowest median score of all clients generally counts.

The exception to this rule is a conventional conforming mortgage with multiple borrowers that’s backed by Fannie Mae. In that case, the lender generally averages the median score of the borrowers on the loan.

Credit score evaluation example

Let’s consider an example where Fannie Mae allows averages. If you have a median score of 580 and your co-borrower on the loan has a 720 median credit score, the average of the two would be 650. Because the minimum qualifying score for conventional loans is 620, this can be the difference in qualifying.

For the purposes of your interest rate and mortgage insurance, the lowest median score is the one that gets reported – which may raise your rate slightly. There are situations where Fannie Mae would still use the lowest middle score for qualification. Speak with a Home Loan Expert if you have questions.

How to increase your credit score before buying a house

Are you looking to improve your credit before buying a home? Take these actionable steps.

Tip #1: Pay your bills on time

The factor that has the biggest impact on your credit is your payment history. This accounts for 35% of your score.

Tip #2: Pay off outstanding debt

The second biggest determinant of your score is the amount of debt you have. This is 30% of your score. You want your debt as low as possible prior to your mortgage. Not only does it mean more room in your budget for your monthly payment, but it has a positive impact on your credit score as you’re not carrying a large amount of debt. The need for cars and homes means zero debt isn’t likely, but you can keep it manageable.

Credit utilization ratio

Credit utilization ratio is a subset of the amounts owed. This looks specifically at the amount you owe on revolving balances like credit cards and home equity lines of credit. This matters because these are the debt amounts that change every month. You usually have a fixed mortgage or car payment. Credit cards are a better proxy for risk because it gives an idea of how extended your finances are.

Credit utilization ratio is calculated by dividing your total credit card balances by your total credit card limits. For example, if you have $2,000 in total credit card balances and $10,000 in limits across all your cards, your utilization is 20%. To keep your credit score in shape, it’s advised to keep your credit utilization under 30%. Of course, paying off your full balance each month helps you avoid high credit card interest.

Tip #3: Don’t apply for new credit

Applying for new credit and loans can be a signal to lenders that you’re in danger of debt beyond your means. Therefore, it’s a good idea not to apply for new credit before getting a mortgage. This accounts for 10% of your score. Each new credit inquiry temporarily drops your score, but it rises again if you make your payments on time. There’s a shopping exemption. Multiple mortgage inquiries in a short time span count as one.

Tip #4: Don’t close existing accounts

The length of your credit history accounts for 15% of your score. The longer you’ve had credit the better. The idea is it gives lenders something tangible showing how you handled payments in the past. The caution here is that the length of your credit history is based on the age of the oldest active account. Keeping accounts open can also help your credit mix, the last 10% of your score. Lenders like a mix of installment and revolving debt.

Tip #5: Check credit reports regularly for mistakes

No data source is perfect. Reports are entered incorrectly, or things occasionally get jumbled. In the worst cases, you may find out someone has stolen your identity and opened accounts in your name. Life is hard enough without being held responsible for things you didn’t do. You should check your credit report regularly. You can get your report from each major bureau once a week through AnnualCreditReport.com.

The report itself doesn’t include a credit score. Rocket Money^SM allows you to receive your updated Experian™ FICO^® Score 2 four times a month.

Additional factors in getting mortgage approval

Credit score is an important factor when qualifying for a mortgage, but it’s importance is intermingled with that of several others as well.

1. Debt-to-income ratio (DTI)

DTI is the percentage of pretax monthly income that goes toward debt payments. The lower the ratio, the more room in your budget for your mortgage payment. To calculate DTI, you add up monthly installment payments on mortgages, personal loans, student loans, and car loans along with the minimum payment on credit cards. This is divided by your monthly income. If you make $3,000 with $1,000 in payments, that’s a 33% ratio.

Mortgage lenders like to see DTI no higher than 45% for most loan options. But you may be able to give yourself slightly more room by qualifying with a higher DTI with a qualifying credit score of 620 or better on an FHA or VA loan.

2. Loan-to-value ratio (LTV)

LTV compares your mortgage balance to your home value. It’s expressed as a percentage. When you buy or refinance a home, you divide the loan amount by the home value. The lower this number, the less risky the loan. You might be approved with a lower credit score with a higher down payment or existing equity amount. You avoid mortgage insurance on a main or second home with a conventional loan and 20% equity (80% LTV).

Let’s say you put $70,000 down on a home purchased for $350,000. Your initial mortgage balance would be $280,000, so you would start with 80% LTV ($280,000 ÷ $350,000 = 0.8).

3. Income and assets

Your lender will want to be sure you maintain a steady income and consistent employment.

Lenders often ask borrowers for documents that validate their income, assets, and work history. These documents may include recent bank statements, pay stubs, and W-2s. In addition to needing savings for a down payment and closing costs, you could also be asked to show reserves. This means having the funds to cover your mortgage payment for several months if you lose your job or experience another financial strain.

The bottom line: Know what credit score you need to buy a house

For most people, the credit score needed to qualify for a home is 580 – 620. But higher scores can mean better rates and more flexibility on DTI, allowing for a bigger monthly payment. If you’re not quite where you want to be, you can improve your score by prioritizing on-time payments, keeping debt at manageable levels, being cautious when opening or closing accounts, and regularly checking your credit reports.

Are you ready to take the next step toward homeownership? Start your mortgage application to see what loan program you qualify for today.