What is the Minimum Credit Score Needed to Buy a House?

It is important to know your credit score before you set out to buy a house. It is one of the many factors that help a lender determine whether or not you qualify for a mortgage. Even if you qualify, a credit score can play a pivotal role in keeping your total cost of a mortgage loan to the minimum. It is needless to say the higher your credit score the better are your chances of approval at a low rate of interest.

What is a Credit Score?

Your credit score is simply a mirror of your financial history. It is based on the credit report that is prepared separately by three credit reporting agencies – Equifax, TransUnion and Experian. You are entitled to receive one free copy from each of these institutions in a year. It is important to do so before you apply for a mortgage and check for any errors that they might contain.

The most popular credit score is FICO, also known as Fair Isaac Corporation, named after the company that is credited with its creation. The FICO score is based on the credit reports, so you need to ensure that these contain no error. Moreover, you should also be aware of the different components of a credit score to keep improving the same if you do not possess an up-to-the-mark score at present.

Minimum Credit Score for a Conventional Loan

The best mortgage rates are reserved for borrowers with a credit score of more than 750. A score of 720 is regarded as good to shop for the lowest interest rates. For many lenders of conventional loans, the minimum credit score that you must possess is 620. So, anything less than this will place you in the category of less-than-perfect credit score.

Minimum Credit Score for an FHA-Insured Loan

An FHA-backed loan option can help if you are below 620 in credit score. The minimum to qualify for such a loan is 580 while still availing the FHA minimum down payment requirement of 3.5 % of the home purchase price. However, if your credit score is less than 580, you need to have some money to put down at closing in order to qualify for an FHA loan.

How a high score can benefit you?

A high FICO score not only help you qualify for a mortgage or refinance option quite easily, but also lower down the rate of interest you pay over the term of the loan. According to an estimate, there can be a difference of one percent in interest rate for scores between 650 and 750.

Consider a loan amount of $300,000 taken on a 30-year fixed-rate mortgage. With a score of 650, you might be offered a rate of 5.5 percent. The rate on the same loan could be 4.5 percent with a credit score of more than 760. You could be paying about $200 extra every month with the lower credit score, which could amount to $72,000 during the entire term of the loan.

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