Your credit score assesses how well you can handle debt, and is important for many things in life, but especially when buying a new home. Buying a new home means securing a large loan, and the mortgage broker needs to have assurance that you will be able to make your payments. When asking how important your credit score is when buying a house, the simple answer is: very. But what is a good score for buying a new home?

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What Credit Score is Needed for a Mortgage?

Every potential home buyer knows that a high credit score is good, and a low credit score is bad. But how high is high enough, and how low is too low? Unfortunately, there is no hard and fast answer. You can get a mortgage with low credit, but that doesn’t mean you’ll get a good rate-and that will affect your monthly payments. Different mortgage options also have different requirements including conventional mortgages, FHA (Federal Housing Administration) loans, and USDA loans.

  • Conventional Mortgage

The absolute minimum score you need to qualify is 620, but many lenders look for a score over 700, and even as high as 720 or 750 to secure the best rates. If you have a score under 700, you will likely get a higher interest rate, which will cost you much more over the life of the loan.

  • FHA Loan

If you have low credit, an FHA loan is your best option. They will offer you a loan with a minimum score of 500. If your score is under 580, you are required to put 10% of the purchase price down on the home. If your score is 580 or better, you can put down as little as 3.5%. However, this doesn’t mean that every lender who processes FHA loans will accept a score of 500. Anything under 600 will be met with a high degree of scrutiny of your full financial picture.

  • USDA Loan

Lenders set their own minimums for these loans guaranteed by the Department of Agriculture, but they’re usually in the mid-600s and come with stipulations on what kind of property you can purchase.

Your First Step to Buying a House

When you are looking for a loan, there are many financial aspects that a lender will look at, but your credit score will hold a lot of weight, especially if this is your first house. If you are ready to buy a house, look at your current credit score, and if it isn’t where you’d like it to be, you can spend some time raising your score to put yourself in a better position when you apply for a loan.

Buying a New Home with a Low Credit Score

If your score is below 600, you will probably struggle to get a loan. A score that low is typically from running up debt and failing to make payments. However, if your credit is in the 600-650 range, which is in the “gray area”, you can still shop around for a mortgage. You can expect to pay higher interest rates or come up with a large down payment to offset the risk to the lender. In other words, buying a new home isn’t impossible, but you will end up spending more money. There are other options that involve relying on others. One spouse with the better score may take out the mortgage alone to avoid having the low score impact the application, or a friend or family member can assume some of the risk and co-sign on the loan.

Sometimes life throws you a curveball and your score may take a hit, but that doesn’t mean you are financially doomed forever. If you are buying a new home and your credit is less than perfect, the best thing to do is work on improving your score through on time payments and saving money for a down payment. It is always worth looking at what you can do to make buying a new home a reality. If you’re ready to look at homes, we can help you find a great place to live. Contact Amberwood Real Estate today.