What Is a Good Credit Score to Buy a Home?

If you're hoping to buy a home with a conventional mortgage, one number you’ll want to get to know well is your credit score. Also called a credit rating or FICO score, this three-digit number is a numerical representation of your credit report, which outlines your history of paying off debts.

Why does your minimum credit score matter? Because when you apply for a mortgage to buy a home, lenders want some reassurance a borrower will repay them later! One way they assess this is to check your creditworthiness by scrutinizing your credit report and score carefully. A high score proves you have reliably paid off past debts, whether they’re from a credit card or other type of loan.

In short, your credit score matters, especially in real estate. This brings us to an important question: What type of average credit score is best to buy a house.

Inside your credit score: How does it stack up?

The typical credit score range can fall anywhere from 300 to 850, with 850 being a perfect credit score. While each creditor might have subtle differences in what they deem a good or great score, in general an excellent credit score is anything from 750 to 850. A good credit score is from 700 to 749; a fair credit score, 650 to 699. A credit score lower than 650 is deemed poor, meaning your credit history has had some rough patches.

While FICO credit requirements will vary between mortgage lenders, generally a good or excellent credit score means you’ll have little trouble if you hope to score a conventional loan. Lenders will want the business of home buyers with good credit, and may try to entice interest rates.

Since a lower credit score means a borrower has had some late payments or other dings on their credit report, an issuer may see this consumer as more likely to default on their home loan. All that said, a low credit score doesn’t necessarily mean you can’t score eligibility for a mortgage loan - but it may be tough when looking at qualifying requirements. They may still give a type of mortgage, but it may be a subprime loan with a higher interest mortgage rate or private mortgage insurance.

How a score is calculated

Credit scores are calculated by three major U.S. credit bureaus: Experian, Equifax, and TransUnion. All three credit-reporting agency scores should be roughly similar, although each pulls from slightly different sources. For instance, Experian looks at rent payments. TransUnion checks out your employment history. These reports are extremely detailed - for instance, if you paid a car loan bill late five years ago, an Experian report can pinpoint the exact month that happened. By and large, here are the main variables that the credit bureaus use to determine a consumer credit score - including debt-to-income ratio - and to what degree.

Payment history (35%): This is whether you’ve made debt payments on time. If you’ve never missed a monthly payment, a 30-day delinquency can cause as much as 90 to 110-point drop in your personal finance score.

Debt-to-credit utilization (35%): This is how much debt a consumer has accumulated on their credit card balances, divided by the available credit limit on the sum of those accounts. Ratios above 30% work against you. So if you have a total credit limit of $5,000, you will want to be in debt no more than $1,500 when you apply for a home loan amount.

Length of credit history (15%): It’s beneficial for a consumer to have a track record of being a responsible credit user. A longer payment history boosts your score. Those without a long-enough credit history to build a good score can consider alternate credit-scoring methods like the VantageScore. VantageScore can reportedly establish a credit score in as little as one month; whereas FICO requires about six months of credit history instead.

Credit mix (10%):  Your credit score ticks up if you have a rick combination of different types of credit card accounts, such as credit cards, retail store credit cards, installment loans, and a previous or current home loan.

New credit accounts (10%): Research shows that opening several new credit card accounts within a short period of time represents greater risk to the lender, according to myFICO, so avoid applying for new credit cards if you’re about to buy a home. Also, each time you open a new credit line, the average length of your credit history decreases (further hurting your credit score).

How to check your credit score

So now that you know exactly what’s considered a good vs. bad credit rating, how can you find out your own credit score and minimum credit score requirements? You can a get free credit score online at CreditKarma. You can also check with your credit card company, since some (such as Discovery and Capital One) offer a free credit score as well as credit reports so you can conduct your own credit check and determine how to reach a higher credit score.

Each credit-reporting agency (Experian, Equifax, and TransUnion) may also provide credit reports and scores, but these may often entail a fee. Plus, you should know that a credit report or score from any one of these bureaus may be detailed, but may not be considered as complete as those by FICO, since FICO compiles data from all three credit bureaus in one comprehensive credit report.

Even if you’re fairly sure you’ve never made a late payment, many Americans find errors on their credit file. Errors are common because creditors make mistakes reporting customer slip-ups. For example, although you may have never missed a payment, someone with the same name as you did - and your bank recorded the error on your account by accident.

If you discover errors, you can remove them from your credit report by contacting Equifax, Experian, or TransUnion with proof that the information was incorrect. From there, they will remove these flaws rom your report, which will later be reflected in your score by FICO. Or, even if your credit report does not contain errors, if it’s notes a great as you’d hoped, you can raise your credit score. Just keep in mind, regardless of whatever credit-scoring model you use, you can’t improve a credit score overnight, which is why you should check your credit score annually - and improve your credit score - long before you get the itch to score a home, save for a down payment, or apply for any type of loan.

Works Cited

Bortz, Daniel. “What Is a Good Credit Score to Buy a House?” Real Estate News & Insights | Realtor.com®, Real Estate News & Insights | realtor.com®, 27 Aug. 2022, www.realtor.com/advice/finance/what-is-a-good-credit-score/.

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