Guidelines for a Good Credit Score When Buying a House

Purchasing a house is a significant financial decision, and having a good credit score is essential. This guide explores the minimum FICO scores required for different types of mortgage loans and provides insights into how credit scores influence loan terms and interest rates.

What is a Good Credit Score for Buying a House?

When it comes to securing a mortgage, different types of loans have varying minimum credit score requirements. Here’s a breakdown of what you need to qualify for each type of loan.

Conventional Loans

The minimum FICO score required for a conventional loan with a 3% down payment is 620. For a more flexible option, an FHA loan with a 3.5% down payment is available to those with a score of 580 or higher. FHA loans, however, come with their own unique requirements and lower down payments.

Federal Housing Administration (FHA) Loans

FHA loans are designed specifically for homebuyers who may not have a high credit score or cannot afford a large down payment. If you have at least a 10% down payment, an FHA loan is available if your credit score is less than 580. For scores 580 or higher, a 3.5% down payment is sufficient to qualify.

Department of Veterans Affairs (VA) Loans

VA loans are available to eligible veterans and their families with no specific minimum credit score requirement. However, lenders typically prefer a minimum score of 620 to ensure the loan's financial stability.

U.S. Department of Agriculture (USDA) Loans

USDA loans, which target rural homeowners, don’t have a set credit score requirement. However, it is advisable to have at least a 640 credit score for the best chances of approval.

Jumbo Loans

Jumbo loans, which exceed the conforming loan limits, often come with stricter requirements. Many jumbo lenders require a credit score of 700 or higher to minimize the risk associated with larger loan amounts.

Important Considerations

Even if you meet the minimum credit score requirements, your lender may use a "mid-score" or the "lowest of the mid-scores" to determine qualification and loan pricing. This means that if you have three FICO scores, the lender will use the median score or the lowest score among the three.

For instance, if a borrower with a 620 score applies for a conventional loan, they may find that the rate and cost of mortgage insurance (PMI) are higher than desired, despite the loan being approved. A borrower with a 5% down payment and a 620 score could end up with a monthly mortgage payment of around $3,675, including taxes, insurance, and PMI.

To illustrate, on May 21, 2024, a conventional loan with a 5% down payment and a 620 FICO score would have an interest rate of approximately 8.25%. The monthly PMI would cost around $304, making the total monthly payment about $3,675. In comparison, an FHA loan with a 5% down payment and a 620 FICO score would have a lower rate of around 7.25%, with a lower monthly mortgage insurance premium (MIP) of 0.85%. The total monthly payment for the FHA loan would be roughly $3,375.

For the best interest rates and loan terms, a high credit score of around 780 or above is ideal. The rate difference between a 720 and a 780 score is very small, but it can save you a significant amount in interest over the life of the loan.

Real-Life Example

In my area, a credit score of 700 or higher is often necessary to enter the mortgage market. This underscores the importance of maintaining a good credit score. A higher score can significantly impact your ability to secure a mortgage and the terms of your loan.

I recently secured a mortgage with an interest rate of 5.59% due to my 850 FICO score. At a score of 700, I would have faced a much higher interest rate, potentially over 7%. This example highlights the direct relationship between credit score and interest rate, further emphasizing the need to maintain a strong credit profile.

ConclusionA good credit score is crucial when buying a house. Understanding the minimum requirements for different types of loans can help you make informed decisions. Consistently paying your bills on time and maintaining a high credit score will not only help you qualify for better loans but also secure more favorable loan terms.