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?

A good credit score to buy a home is one that helps you secure the best mortgage rate and loan conditions for the mortgage you’re applying for. You’ll typically need a credit score of 620 to finance a home purchase. However, some lenders may offer mortgage loans to borrowers with a score as low as 500.

Keep in mind that whether you’ll qualify for a specific loan type doesn’t solely depend on your credit score. Factors such as your debt-to-income ratio (DTI), loan-to-value (LTV) ratio and income will also be taken into consideration.

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

Your credit score is a number that’s used to indicate your creditworthiness.

Though lenders consider a higher score more favorable, it’s still possible to get a mortgage with a lower credit score. It largely depends on the type of loan you’re applying for. In the table below, take a look at the credit score 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?

Before we get into the credit score you’ll need to qualify for a mortgage, it’s important to understand how lenders determine your credit score. After all, your FICO^® Score is reported by three credit reporting agencies – Equifax^®, Experian™ and TransUnion^®.

These national bureaus collect information from lenders, banks and other companies. The bureaus then compile that information to formulate your credit score based on the following factors:

• Your payment history
• How you use your available credit
• The length of your credit history
• New credit accounts
• The different types of credit you use

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 and 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 among them is generally considered the qualifying credit score.

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

How to increase your credit score before buying a house

If you want to qualify for a loan and your credit score isn’t up to par, you can take actionable steps to improve your credit score before buying a house.

Tip #1: Pay off outstanding debt

One of the best ways to increase your credit score is to identify any outstanding debt you owe and make payments on that debt until it’s paid in full. If your debt responsibilities go down, you have room to take on more, which means you’re less of a risk to your mortgage lender.

Credit utilization ratio

Paying down your credit card balances also improves your credit utilization ratio, or the amount of money you spend compared to your total credit limit. Lenders look at this ratio to determine how you manage your existing debts. The lower your credit utilization ratio, the more reliable you appear as a borrower.

To calculate your credit utilization ratio, simply divide how much you owe on your card by how much spending power you have. For example, if you typically charge $2,000 per month on your credit card, divide $2,000 by your total credit limit of $10,000. Your credit utilization ratio is 20%.

Tip #2: Pay your bills on time

A large part of what a lender wants to see when they evaluate your credit is how reliably you can pay your bills. This includes all monthly payments, not just auto loans or mortgages. For example, utility bills and cell phone bills matter, too.

Tip #3: Don’t apply for too much credit

You should resist the urge to apply for more credit cards as you try to build your credit score. New credit applications put hard inquiries on your credit report. Too many hard inquiries can negatively affect your credit score.

Tip #4: Check credit reports regularly for mistakes

Your credit reports are an essential part of understanding your credit score because they detail your credit history. Any mistake on your credit reports could lower your score, so it’s important to check your credit reports regularly and report any errors to one of the credit reporting agencies.

You’re entitled to a free credit report from all three major credit bureaus once a week. It’s also important to note that mortgage lenders will usually order a tri-merge credit report when assessing your credit history.

Additional factors in getting mortgage approval

A home buyer’s credit score is just one element that goes into a lender’s approval of a mortgage. Here are some other factors that lenders consider when qualifying you for a mortgage.

1. DTI

Your DTI is the percentage of your gross monthly income that goes toward paying off debt. The less debt you have in relation to your income, the less risky you appear to lenders.

To find your DTI, divide your recurring monthly debt (including credit cards, student loans and car payments) by your monthly income. Here’s an example:

If your total debt is $1,000 per month and your monthly income is $3,000, your DTI is $1,000 / $3,000 = 0.33, or 33%.

It’s advantageous to have a DTI of 50% or lower. Many lenders require a DTI significantly lower than 50%. The lower your DTI, the better your chance of being offered a better interest rate.

2. Loan-to-value (LTV) ratio

The loan-to-value ratio (LTV) is also considered. Your LTV is the loan amount divided by the home’s purchase price.

Suppose you buy a home for $350,000, put $70,000 down and take out a mortgage loan for $280,000. Your LTV would be 80%. As you pay off more of your loan, your LTV decreases. A higher LTV is riskier for your lender because it means your loan covers a majority of the home’s cost.

LTV decreases when your down payment increases. Considering the example above, if you take out a $250,000 loan and put $100,000 down ($30,000 more than before), your LTV is now 0.71, or 71%.

LTV and mortgage insurance

LTV ranges vary by lender, but it’s best if your ratio is 80% or lower. If your LTV is greater than 80% on a conventional loan, you’ll be required to pay private mortgage insurance (PMI).

This isn’t the case with every type of home loan, though. For example, VA loans and USDA loans allow you to finance the full purchase price of the house (which means putting no money down) without paying mortgage insurance.

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. The steadiness of your income could affect the interest rate you’re offered.

The bottom line

The credit score required to buy a home varies based on the type of loan you’re applying for. The higher your score is, the easier it can be to qualify for a mortgage loan. If you’re starting the home buying process, remember to stay on top of your score and check your credit report regularly.

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