Owning & Renting Property

How Your Credit Score Affects Buying a House

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Buying a home is one of the largest and most important investments many consumers ever make — and your credit score can make a big difference. If you are considering this major purchase, understanding your credit score can help you better navigate the options (and challenges) of the mortgage loan marketplace.

Assessing your current credit score can help you determine if you have the sufficient credit score needed to buy a home. You can then take steps to improve it and potentially increase your chances of obtaining the mortgage you want, on terms you can afford. That’s because credit score ratings may have a significant effect on your ability to obtain a mortgage loan and on the interest rates and terms you are offered by lending companies.

What is a good credit score range?

Let’s start off by looking behind the numbers of your credit score, which is a numerical representation of your overall financial history as determined by the three major credit reporting agencies:

Each of these credit bureaus uses only the information reported to their company to determine your score. This can cause variations in the scores reported by TransUnion, Equifax and Experian. Most credit score ratings fall in the range of 301 to 850, with higher scores preferred by lenders when considering applications for consumer credit.

Additionally, a FICO® score, which is a person’s credit score calculated with software from the Fair Isaac Corporation, is most commonly used by lenders to determine your eligibility for mortgages and other loans. This credit score is determined by examining financial data and comparing that information with other consumers to come up with a relative ranking.

A FICO Score between 740 and 850 is generally considered to be in the very good to excellent credit score range to buy a home. If your score falls below this level, however, you may still be eligible for some mortgage opportunities in the financial marketplace.

How are your credit score ratings used when buying a home?

Lenders look at a wide range of factors when considering your eligibility for mortgage arrangements. Some of the most important of these include the following:

Employment and residence history
Outstanding debt and ongoing obligations
Amount of your down payment
Your FICO® Score from one or more of the credit bureaus

Your mortgage lender will consider the entire picture when looking at your financial situation. The goal is to reduce the risk incurred for the loan to ensure that you can afford the terms and payments and that the lending institution can recoup its investment.

Mortgage loans are available for a relatively wide range of credit scores, so there is no magic credit score to buy a home. Buying a home with bad credit is possible with a large enough down payment, low outstanding debt and stable work and residence histories.

In many cases, however, it may be to your advantage to reduce your debt load and to improve your credit scores before attempting to buy a home.

What is a good credit score range for buying a home?

If your credit score range is between 740 and 850, you are likely to have the widest range of choices and the most attractive interest rates for your mortgage loan. Most lenders determine mortgage rates by credit score, making it less likely to achieve low interest rates if your FICO® scores are below 740.

You might still be offered a mortgage loan with lower scores, but the terms may not be as favorable. You could also be approved for a lower mortgage amount than the sum for which you originally applied.

The Federal Housing Administration (FHA) may also be an alternative for first-time home buyers who meet certain criteria. If you are wondering how to buy a home with bad credit, an FHA loan may be the answer for you. Some of the primary requirements for an FHA mortgage include the following:

You must provide a down payment of at least 3.5 percent of the home’s value.
You must be a legal resident of the U.S. with a valid Social Security number.
Your debt-to-income ratio, including all outstanding loans and your new mortgage, must usually be 43 percent or less.
You must have worked for the same employer for at least two years or have a generally stable employment history to qualify.

If you do not meet these criteria, however, you may still be able to obtain a mortgage loan. Some lending companies specialize in providing mortgage opportunities for individuals with worse credit scores; the terms and interest rates offered for these arrangements, however, may be too unfavorable for most home buyers.

A home buying calculator can sometimes provide you with added insights into the mortgage amounts and interest rates you may be offered by lending companies. If your current credit score is limiting your ability to obtain a mortgage, working to improve your financial situation for a relatively short period of time can often increase your odds of success in obtaining a home loan you can afford.

Tips for increasing your credit score when planning to buy a home

The ways in which you can improve your credit scores depend on the reasons behind those scores. The experts at Experian have some helpful suggestions for how to increase your credit score over time:

  • Build your credit file by opening accounts that will be reported to major credit bureaus, like TransUnion, Equifax and Experian.

  • Don't miss payments by more than 29 days to build up a solid payment history.

  • Catch up on past-due accounts with the help of a credit counselor or a debt management plan (DMP).

  • Pay down revolving account balances and keep your balance low relative to your credit limit. For example, if your credit limit is $1000, keeping it below $700 is great.

  • Limit how often you apply for new accounts to decrease the amount of hard inquiries on your account.

By making a concerted effort to improve your credit rating, you can increase your chances of obtaining a mortgage loan. A higher credit score can also pave the way for lower interest rates and more favorable terms for you. This can have a positive effect on your long-term financial situation while ensuring that you enjoy the benefits of home ownership for many years to come.

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