How High Does My Credit Score Need to Be to Buy a House?
You’re probably aware of how much of an impact your credit score has on your entire life—from buying a home or car to signing up for a new credit card. While your scores affect just about every part of your life, especially when it comes to financial decisions, the question remains as to whether or not one needs a top-notch credit score to take out a loan and purchase a home. Can you have less than stellar credit and still buy that house you’ve had your eye on?
What Credit Score Do You Need to Get a Decent Mortgage?
To give a bit of background, credit scores generally range from between 300 and 800, with 300 being the worst score and 800 being the best. While you could get a decent mortgage at 580, most lenders are looking for those between 640 and 660 on the low end, with scores in the 700s and 800s being ideal.
It’s true that mortgage lenders don’t just consider your credit score when determining a loan amount or your interest rate. However, it does play a big role in their decision. They want to feel confident in your ability to pay back the loan on time and in full. Those with bad credit are considered higher risk, so it stands to reason that the higher your score is, the more trustworthy you are in the eyes of lenders. A credit score of at least 660 will allow you to qualify for a fairly good mortgage rate.
Can I Buy a House With No or Bad Credit?
However, just because you have a lower credit score doesn’t mean you can’t buy a house. You may qualify for a smaller home loan at a higher interest rate than your neighbor who has a top score in the 800s, but home ownership is still a viable option for you. Credit scores are determined by a variety of factors, such as payment history, debts, how many credit lines you have, credit history length and what types of credit you have used in the past. Most of your credit score takes into consideration any outstanding debts you owe as well as your payment history. If you’ve skipped quite a few payments or made late ones too often, this will definitely reflect in your credit score. Lenders will see that and be less eager to give you a great rate because they consider you a risk. A benchmark to strive for is to have a credit score of 760 or higher to get the lowest interest rate available on your loan. There’s a little wiggle room below that, but if you have a score under 660, expect to see much higher interest rates, with another increase once your score hits 580 and below.
How Do You Improve Your Credit Score?
If you don’t have good credit, don’t fret. There are ways to improve it before you get into the house-buying process. A year before you plan to buy, stop opening new credit cards. Check out your credit reports and scrutinize them to make sure all the information is correct. If you have old or settled debts that you know you have paid, correct those issues now, before you apply for a loan. Save up enough money to make the down payment, which is typically anywhere between 3.5% and 20%. If you employ these suggestions a year before you shop for a home, your credit score can definitely improve, opening up a whole new world of possibilities for you.