What Credit Score Do You Need to Buy a House in 2021?

What Credit Score Do You Need to Buy a House in 2021 : A good credit score is an important factor when applying for a mortgage loan. Not only does it affect your initial qualification for the loan, but it also impacts the interest rate, down payment requirements, and other terms of your mortgage.

Are you considering buying a house and want to be sure your credit is ready? Here’s what you need to know.

How Credit Score Impacts Your Mortgage Prospects

At the beginning of the homebuying process, your credit score will play a big role. It determines which loan types you’ll even consider initially. Some loan types require minimum scores as high as 640 (conventional loans), others go as low as 500 (some FHA loans).

 

In addition, your credit score also impacts the cost of the mortgage. This is because your credit score represents your level of risk to the mortgage lender. Having a high score represents your ability to repay your mortgage in full. As a result, you’ll qualify for lower interest rates.

 

In contrast, if your score is low, it means you are a risky investment for a lender. To make up for the extra risk—that chance of you not paying your loan or foreclosing on your house—they’ll boost the interest rate to protect themselves.  

 

According to the Consumer Financial Protection Bureau, if you purchase a $250,000 home in Texas in 2019 and put 10% down, your interest rate would generally look like this:1

Effect of Credit Score on Loan Rates (2019)

Credit Score Range

Interest Rate

620 to 639

5.25% to 5.99%

640 to 659

4.125% to 5.875%

660 to 679

4.0% to 5.625%

680 to 699

3.875% to 5.625%

700 to 719

3.75% to 5.5%

720 to 739

3.75% to 5.125%

740 to 850

3.625% to 4.99%

Considering this specific loan amount, just a percentage-point difference would mean close to $10,000 in interest savings over the first five years and over half a million dollars over the life of the loan.

The Impact of COVID-19

Since COVID-19 resulted in historically low interest rates, your credit score may play a smaller role in your loan rates than in a typical economy. Consider the following scenario in the current economy:1.4

Effect of Credit Score on Loan Rates (2021)

Credit Score Range

Interest Rate

620 to 639

2.250% to 3.875%

640 to 659

2.250% to 3.875%

660 to 679

2.250% to 3.875%

680 to 699

2.250% to 3.875%

700 to 719

2.250% to 3.875%

720 to 739

2.250% to 3.875%

740 to 850

2.250% to 3.875%

While the pandemic has had a huge impact on interest rates, you cannot anticipate it occurring every year. Therefore, it is important to know how your credit score affects your loan interest rates.

Credit Score Requirements by Mortgage Loan Type

There are four main types of mortgage loans:

  • Conventional loans, which are backed by Fannie Mae and Freddie Mac
  • FHA loans, or those from the Federal Housing Administration
  • USDA loans, which are designated for rural properties and are guaranteed by the U.S. Department of Agriculture.
  • VA loans designed for military members and veterans

Each of these loans has different credit score requirements. Here’s how they break down:

  • FHA loans: Minimum 500, with an average score of 680
  • Conventional loans: Minimum of 620 to 640, depending on the type of loan
  • USDA loans: Minimum 580, though 640 preferred
  • VA loans: No credit score requirement

On FHA loans, your FICO score directly correlates to the amount of down payment you’re required to pay. If your score is over 580, you’ll need at least 3.5%, and if it falls below that, your down payment will be at least 10%.3

What Kind of Credit Report and Score Do Lenders Use?

It depends on who is issuing the credit score (a bank, FICO, VantageScore) and the industry (auto, mortgage, credit card) as to what versions of your credit score you will receive.

 

Most lenders will use a credit report called a “tri-merge” that shows credit details from multiple credit bureaus to offset their risk and ensure they get the most accurate picture of mortgage borrowers.

 

Alternatively, they may use your residential mortgage credit report, which may also include details about your financial circumstances such as rental history or records from public sources. These reports provide information from multiple bureaus, including TransUnion, Experian, and Equifax. 

 

Most often, the credit score you see as a consumer—probably through your bank or credit card company—is different from the credit score a potential lender would see.

Improving Your Credit Score

A number of factors go into determining your credit score, including your repayment history, total balances on your accounts, how long you have had those accounts, and your number of credit inquiries. Improving in any one of those areas can help increase your score.

You can:

  • Pay down your existing debts and credit card balances
  • Resolve any credit issues or collections
  • Avoid opening new accounts or loans
  • Pay your bills on time, every time

Your credit report may also contain inaccuracies or errors that need to be corrected. If you find any, you may want to file a dispute by sending the documentation. 

Your score could be boosted by correcting any errors that you find.

The law permits you to get a free copy of your credit report every year from each of the credit bureaus. However, as of April 20, 2020, the three major bureaus—Equifax, TransUnion, and Experian—will extend the program to one copy every week. 

 

This right has since been extended, enabling people to get a free copy of their credit report on a weekly basis through 2022.

 

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