What Credit Score Is Needed to Buy a House?

A favorable credit score for buying a home typically falls within the high 600s to 700s. Scores in this range are considered "good," while anything higher is seen as "excellent," helping borrowers qualify for the best mortgage rates. Some loan types even allow buyers to secure a mortgage with a credit score as low as 500. It's possible to buy a house with a variety of credit scores, but the higher your score, the better your chances of getting favorable loan terms. If you're paying for a home in cash, your credit score won’t matter, as you won’t be working with a lender. How important is your credit score when buying a home? Your credit score is critical when it comes to buying a house. Not only does it affect your ability to qualify for a mortgage, but a higher score typically means a lower interest rate. Even a difference of 0.25% to 0.5% in interest can save you thousands of dollars over the life of a loan. Lenders rely on credit reports because they give a snapshot of how well you’ve managed debt over time. A high score signals that you're a responsible borrower, while a low score suggests you’ve had issues handling debt, making lenders see you as a higher risk. Beyond the credit score, lenders look at your entire credit report, which includes your payment history, types of credit accounts, and whether you've had any significant financial problems like collections or bankruptcy. Mortgage FICO scores: What lenders use for home buying When applying for a mortgage, lenders use your FICO score, which is a credit score model specifically used for mortgages. FICO scores are based on data from the three major credit bureaus—Experian, Equifax, and TransUnion—and range from 300 to 850. What influences your FICO score? Your FICO score is calculated using various factors, including: Payment history: 35% (whether you pay debts on time) Credit utilization: 30% (how much of your available credit you’re using) Length of credit history: 15% (how long you’ve had credit accounts) Credit mix: 10% (types of credit accounts, like credit cards and loans) New credit activity: 10% (recent applications for credit) What if you're buying with a partner? If you're buying a home with a co-borrower, your lender will look at both credit scores and use the lowest middle score to determine your loan terms. For example, if your middle score is 720 and your co-borrower’s middle score is 660, the lender will use 660 as the decision score. This can affect the loan terms you qualify for. What is a good credit score to buy a house? A credit score of 720 or higher is considered good, while a score above 800 is ideal and can unlock the best loan rates. If your score is around 670, you can still qualify for decent rates, though they might not be as low as those for higher scores. Mortgage credit score ranges Lenders use FICO scores to assess your eligibility for home loans. However, if you check your credit score through a bank or credit card, you might see a Vantage score, which can differ slightly. Both scores use a range of 300 to 850, but weigh factors differently. Here’s a comparison: Credit Rating FICO Score Vantage Score Excellent 800-850 720 and above Good 670-799 660-719 Fair 580-669 620-659 Poor Below 580 Below 620 Minimum credit score to buy a house The minimum credit score needed depends on the type of loan: Conventional loans: Typically require a score between 620 and 660. FHA loans: Can be obtained with a score as low as 500, but most lenders prefer 580 or higher. VA loans: Typically require a score between 580 and 620. USDA loans: Usually require a score between 580 and 620. Jumbo loans: Often require a score of 680 to 700. Other factors lenders consider In addition to your credit score, lenders look at your: Income and assets: You’ll need proof of income (W2s, pay stubs, tax returns) and assets (bank statements) to show you can afford the mortgage. Employment history: Lenders verify your job status and income stability. Debts: Lenders will review your current debt obligations to ensure you can manage monthly mortgage payments. Debt-to-income (DTI) ratio: This ratio compares your monthly debt payments to your gross monthly income. A healthy DTI is generally below 50%. Loan-to-value (LTV) ratio Lenders calculate your LTV ratio by comparing the loan amount to the appraised value of the home. A lower LTV ratio can help you avoid mortgage insurance and secure better loan terms. How to improve your credit score If you're aiming to boost your credit score before buying a home, consider these tips: Pay off delinquencies: Prioritize paying off any late debts. Use automatic payments: Set up automatic payments to avoid missing due dates. Lower your credit utilization: Keep your credit card balances low compared to your credit limits. Keep accounts open: Even if you don’t use them, keeping older accounts open can help improve your credit history. Buying a home with bad credit Even with a low credit score, homeownership may still be possible. Some loans, like FHA loans, allow for scores as low as 500 with a larger down payment. Speak with a lender to explore your options. FAQs: Credit Scores and Home Buying Can you buy a house without a credit score? If you're paying in cash, yes. If you're financing, no—you’ll need a credit score. Do you need good credit to buy a house? You can buy a house with less-than-perfect credit, but expect higher interest rates and larger monthly payments. What credit score is ideal for buying a home? A score of 720 or above is ideal for securing the best loan terms.

7 Types of Refinance Loans

Homeowners refinance their mortgages for a variety of reasons, such as securing a lower interest rate, shortening the loan term, or tapping into their home equity for cash. In fact, a survey found that 59% of homeowners with a mortgage who haven’t moved in the past year have refinanced their current home loan. If you're considering refinancing, here's a guide to common types of refinance loans and what might work best for you. Rate-and-Term Refinance A rate-and-term refinance is the most common type of refinancing. In this case, your original loan is replaced by a new mortgage with different terms and possibly a new interest rate. Homeowners often pursue this option to lower their interest rate or monthly payment. It can also help you switch from a 30-year loan to a shorter 15- or 20-year loan, or eliminate private mortgage insurance (PMI). If you have an adjustable-rate mortgage (ARM), this refinance allows you to switch to a fixed-rate mortgage for more predictable payments. Consider this option if: Interest rates are lower than your current rate, or you want to remove PMI or pay off your loan faster. Eligibility: Conventional fixed-rate, adjustable-rate, VA, FHA, and USDA loans qualify. Private money loans, construction-to-permanent loans, and seller-financed loans may also qualify. Requirements: Typically, a minimum credit score of 620 and proof of sufficient income are required, though specific criteria may vary by lender. Cash-Out Refinance A cash-out refinance lets you take out a new mortgage for more than your current loan balance, allowing you to access some of your home’s equity as cash. This option results in a higher principal balance but offers a way to fund large expenses, such as home improvements, debt consolidation, education costs, or even the purchase of an investment property. Consider this option if: You need cash for significant expenses and prefer a lower interest rate than what you’d get from a credit card or personal loan. Eligibility: Available for conventional, VA, FHA, and USDA loans, though USDA loans must be refinanced into a different loan type. Requirements: Typically, a credit score of 620 or higher and a debt-to-income ratio below 50%. You’ll also need enough home equity to maintain an acceptable loan-to-value (LTV) ratio. Streamline Refinance Streamline refinances are designed for government-backed loans such as FHA, VA, or USDA loans. This option simplifies the refinancing process by reducing paperwork and eliminating the need for a home appraisal. Streamline refinances come in two types: credit-qualifying and non-credit-qualifying, with the latter often not requiring a credit check. Consider this option if: You want a quicker, simpler way to improve your interest rate while staying with your current loan program. Eligibility: Available for homeowners with existing FHA, VA, or USDA loans. Requirements: You must have a government-backed mortgage and a good payment history. Cash-In Refinance A cash-in refinance is the reverse of a cash-out refinance, where you pay down your mortgage with a lump sum to reduce your loan balance. This option can help you lower your monthly payments, get a better interest rate, or eliminate PMI. Consider this option if: You have extra cash on hand and want to reduce your mortgage balance, lower your payments, or get rid of PMI. Eligibility: Typically available for conventional loans, though they are less common than other refinancing options. Requirements: Generally, you don’t need 20% equity to qualify, but criteria may vary by lender. No-Closing Cost Refinance Closing costs can be a hurdle for many homeowners considering refinancing. A no-closing cost refinance offsets these costs by incorporating them into the loan in exchange for a slightly higher interest rate. This option is often suitable for homeowners planning to move or refinance again in the near future. Consider this option if: You don’t have the funds for closing costs or expect to move within a few years. Eligibility: Most conventional, FHA, and VA loans offer no-closing cost options. Requirements: Typically, you’ll need a credit score of at least 620, along with proof of income. Short Refinance A short refinance is an option for homeowners who are underwater on their mortgage, meaning they owe more than the home is worth. With this refinance, your lender agrees to pay off your existing mortgage and replace it with a new loan at a reduced balance. While rare and lender participation is voluntary, this option can help avoid foreclosure. Consider this option if: You're underwater on your mortgage and at risk of foreclosure. Eligibility: Available for non-FHA loans, though it depends on your lender’s willingness to offer this option. Requirements: You must be current on your payments, and lenders typically require a credit score of at least 500. Fannie Mae High LTV Refinance Option (HIRO) The High LTV Refinance Option (HIRO) is designed for homeowners with a Fannie Mae-backed mortgage who want to refinance but lack sufficient equity. It’s ideal for those who may owe more than their home is worth and want to benefit from lower interest rates. Consider this option if: You have little equity but want to take advantage of lower rates. Eligibility: Available for conventional loans backed by Fannie Mae. Requirements: You must have lived in your home for at least 15 months, be current on your payments, and have closed on or after October 1, 2017. How Much Does It Cost to Refinance? Closing costs on a refinance typically range from 2% to 6% of the loan amount. These costs include loan origination fees, appraisal fees, title fees, and credit report fees. Some types of loans, like VA refinances, also have additional fees such as a funding fee. You can often roll these closing costs into your new mortgage, reducing the need for upfront cash at closing, as long as your loan-to-value ratio allows. Which Refinance Option is Best for You? Choosing the right refinance option depends on your financial situation, current mortgage, and long-term goals. Take into account your equity, loan type, and eligibility criteria before deciding on the best path forward. Once you're ready, compare rates and reach out to lenders to discuss which option works best for your needs.

Conventional Loans: Requirements and What You Need

What is a Conventional Loan? A conventional loan, also known as a conventional mortgage, is a loan offered by private lenders such as banks, credit unions, or mortgage companies. These loans are not backed by the government. Many conventional loans are purchased by Fannie Mae and Freddie Mac, so lenders often require you to meet their standards. Unlike FHA, VA, or USDA loans that are available to specific buyers based on factors like income, location, or military service, conventional loans are open to borrowers who meet the lender’s qualification requirements. The Difference Between Conventional and Government Loans Government-backed loans, like FHA, VA, and USDA loans, are insured by the federal government, which provides lenders with protection if the borrower defaults. This insurance allows lenders to offer loans to individuals who may not qualify for a conventional loan. Government loans often come with more flexible terms, such as lower down payments and interest rates, for those who meet the criteria. On the other hand, conventional loans are not insured by the government and usually have stricter requirements, such as higher credit scores and larger down payments. These loans are more appealing to investors, which is why many lenders sell them after closing. Conventional Loan Requirements Conventional loans typically require a higher level of qualification than government-backed loans. Requirements can vary by lender, but here are some general guidelines: Minimum Credit Score: Generally, a credit score of 620-660 is required, though higher scores (720 or above) will usually get you the best rates. Debt-to-Income Ratio (DTI): Lenders will calculate your DTI by comparing your monthly debt obligations to your monthly income. A DTI of around 45% is typical, but some borrowers may qualify with a DTI as high as 50% or as low as 36%, depending on other factors. Down Payment: You can make a down payment as low as 3%, but if you put down less than 20%, you’ll need to pay for private mortgage insurance (PMI). The higher your down payment, the less you’ll pay in PMI. What You Need for a Conventional Loan To apply for a conventional loan, lenders will require documentation such as: Proof of Income: Recent pay stubs and tax returns. Employment Verification: Lenders will check that you're currently employed. Assets: Bank statements and proof of any gift funds used for your down payment. Proof of Identity: A valid ID, such as a driver’s license. Credit Report: Lenders will check your credit score and history. Conforming vs. Non-Conforming Loans Conventional loans can be conforming or non-conforming. A conforming loan meets the guidelines set by Fannie Mae and Freddie Mac, including a loan limit (which for 2024 is $766,550). Non-conforming loans, such as jumbo loans, do not meet these guidelines, often because the loan amount exceeds the conforming limit. Pros and Cons of Conventional Loans Pros: Flexible loan terms and options. Available for second homes or investment properties. PMI can be removed once you reach 20% equity. Down payments can be as low as 3% for qualified buyers. Cons: Stricter qualification criteria, particularly around credit scores and debt-to-income ratios. Requires PMI if the down payment is less than 20%. How to Get a Conventional Loan You can begin the process with a pre-qualification, which gives you a general idea of what loans you may qualify for without affecting your credit score. Once you’re ready, you can apply for pre-approval, which requires a credit check and a review of your financial documents. If pre-approved, the loan process will proceed through underwriting and, ultimately, closing. Interest Rates and Closing Costs Your interest rate on a conventional loan depends on several factors, including your credit score, loan amount, and whether you choose a fixed or variable-rate mortgage. To lower your rate, you might consider paying mortgage points, where 1 point equals 1% of the loan amount and reduces your interest rate by 0.25%. Closing costs typically range from 2-5% of the purchase price. Sellers can contribute to closing costs, with the amount depending on your down payment size. When deciding which loan is best for you, consult with a lender to compare monthly payments, interest rates, and other factors.

FHA Loans: A Comprehensive Guide to Federal Housing Administration Loans

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). It comes with both advantages and disadvantages, which can help you decide if this loan type is right for you. FHA Loans: A Comprehensive Guide to Federal Housing Administration Loans FHA loans, backed by the Federal Housing Administration, are popular with first-time homebuyers and people with lower credit scores or limited savings. These loans make homeownership more accessible by offering lower down payment options and more flexible credit requirements compared to conventional loans. Let’s explore how FHA loans work, who qualifies, and why they might be a good fit for you. What is an FHA Loan? An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency that provides lenders with a safety net in case the borrower defaults. This guarantee allows lenders to offer more favorable terms, such as lower down payments and easier credit qualification, making homeownership more attainable for those who might not meet the stricter requirements of a conventional loan. How Does an FHA Loan Work? With an FHA loan, the borrower must meet certain qualifications, but the requirements are generally more lenient than those for conventional loans. Borrowers can put down as little as 3.5%, and credit score requirements are typically lower. However, FHA loans require borrowers to pay mortgage insurance premiums (MIP), which protect the lender if the borrower defaults. This insurance includes both an upfront premium and an annual premium. Who Qualifies for an FHA Loan? FHA loans are especially appealing to first-time homebuyers or those with less-than-perfect credit. However, eligibility is not limited to these groups. Here’s a general breakdown of the qualifications: Credit Score: You’ll need a minimum credit score of 580 to qualify for a 3.5% down payment. Borrowers with credit scores between 500 and 579 may still qualify but will need to make a 10% down payment. Down Payment: FHA loans allow for down payments as low as 3.5%, making it easier for buyers who don’t have a lot of savings. Debt-to-Income Ratio: Lenders typically prefer a debt-to-income (DTI) ratio of 43% or less, but some may accept higher ratios depending on other factors like credit score and savings. Employment History: Lenders usually require proof of steady employment and income for at least two years. Benefits of FHA Loans Low credit score requirements: You may qualify for an FHA loan with a credit score as low as 500, although most lenders prefer a minimum score of 580. This is still lower than the conventional loan minimum of 620, offering more flexibility for those with less-than-perfect credit. The higher your credit score, the better your loan terms will be. Low down payment requirements: FHA loans are available with down payments as low as 3.5% of the purchase price, making homeownership more accessible. While a 20% down payment is ideal for many types of loans, FHA loans allow for more manageable upfront costs. Competitive interest rates: FHA loan interest rates are often on par with, and sometimes even lower than, conventional loans. This is partly due to the government backing, which reduces the lender’s risk. Your specific rate will depend on your financial profile and mortgage insurance. No prepayment penalty: You can pay off your FHA loan at any time without facing penalties, whether you want to refinance or sell the home early. Down payment assistance: FHA loans are compatible with various down payment assistance programs, offering additional support to make purchasing a home even more affordable. Loan Closing Costs: What You Need to Know When budgeting for a home purchase, it's important to account for closing costs. These are the out-of-pocket expenses you’ll need to cover to finalize your loan. They typically include lender fees, appraisals, title services, and documentation costs. Closing costs for buyers usually range between 2% to 5% of the home’s purchase price and are paid at closing. These costs may reduce the cash you have available for other upfront expenses, such as mortgage insurance premiums. Most FHA loans follow guidelines that limit certain fees, like lender origination fees, which are capped at 3% of the loan amount for home purchases over $100,000. However, this cap does not apply to all closing costs, so it's important to review all the fees involved. FHA guidelines also allow sellers to contribute toward the buyer’s closing costs—up to 6% of the purchase price—meaning you may be able to negotiate for the seller to cover some or all of these costs when making your offer. For example, if you're purchasing a $300,000 home with an FHA loan and a 3.5% down payment ($10,500), you’d be borrowing $289,500. Closing costs could range between $6,000 and $15,000. FHA guidelines mean your lender can’t charge more than $15,000 in fees, and it’s possible to negotiate with the seller to cover all of those costs as part of the sale agreement. Drawbacks of FHA Loans While FHA loans have their advantages, there are also some potential downsides to consider: Mortgage Insurance Premiums: FHA loans require both an upfront mortgage insurance premium (UFMIP) and annual mortgage insurance premiums (MIP), which can add to your monthly payments. Unlike private mortgage insurance (PMI) on conventional loans, FHA mortgage insurance typically lasts for the life of the loan unless you refinance into a conventional loan. Loan Limits: FHA loans have borrowing limits that vary by location, based on the median home prices in your area. This can limit the size of the home you can buy with an FHA loan in high-cost areas. Property Requirements: The home you’re purchasing must meet certain safety and livability standards. The FHA has specific property guidelines, and your home will be appraised accordingly. FHA Loan vs. Conventional Loan The biggest difference between FHA and conventional loans is how they’re insured and the qualification requirements. FHA loans are government-backed, making them more forgiving for buyers with lower credit scores or limited savings. Conventional loans, on the other hand, typically have stricter credit and income requirements but can be more affordable in the long term, especially if you can make a larger down payment. Here’s a comparison to help you decide which loan might be right for you: Feature FHA Loan Conventional Loan Down Payment 3.5% (for credit scores 580 and above) 3-20%, depending on lender requirements Credit Score 500-579 (with 10% down), 580+ (with 3.5% down) 620+ Mortgage Insurance Required for the life of the loan (unless refinanced) Required with less than 20% down, but can be canceled Loan Limits Varies by location, based on FHA limits Higher limits, based on conventional guidelines Interest Rates Often lower, but mortgage insurance can increase the overall cost Can be lower with good credit How to Apply for an FHA Loan Applying for an FHA loan is similar to applying for other types of home loans. Here’s what the process generally looks like: Find a Lender: Not all lenders offer FHA loans, so be sure to choose one that does. Compare offers from several lenders to ensure you’re getting the best terms and rates. Get Pre-Approved: Pre-approval involves submitting documentation like proof of income, bank statements, and credit reports. This step helps you understand how much you can borrow. Submit Your Loan Application: After you find a home, you’ll submit a formal loan application and provide the necessary documentation. Home Appraisal: FHA loans require an appraisal to ensure the home meets minimum property standards. Close on the Loan: Once your loan is approved and the appraisal is complete, you’ll close on your loan and move into your new home. Is an FHA Loan Right for You? FHA loans can be a great option for first-time homebuyers, those with lower credit scores, or anyone struggling to save for a large down payment. However, it’s important to weigh the costs, such as mortgage insurance premiums and potential loan limits, before making a decision. Talking to a lender and exploring all of your options will help you find the loan that best fits your financial situation and homeownership goals.