DR 072: What Credit Score do You Need to Buy a Home?

Credit score needed to buy a homeWhen it comes to mortgages and credit scores, there are two really important questions to ask:

  • What credit score do I need to qualify for a mortgage?
  • What credit score do I need to get the lowest interest rate on a mortgage?

These different but related questions are important if you are looking to buy a home. And the second question is particularly important. With a high FICO score, you can literally save tens of thousands of dollars in interest over the life of a home loan. So let’s take a look at both questions. And if you don’t know you score, be sure to get you free credit score.

Listen to the Podcast Version of this Article

What credit score do you need to qualify for a mortgage?

The first thing to keep in mind is that qualifying for a mortgage involves a lot more than just a credit score. While your FICO score is a very important ingredient, it is just one factor. Lenders also look at your income and level of debt, among other things.

As a rule of thumb, however, a credit score below 620 will make buying a home very difficult with a conventional mortgage. A FICO score below 620 is considered sub-prime. In the past there were mortgage companies that specialized in sub-prime mortgages. Because of the challenges in the credit market over the last year or so, however, sub-prime loans have become difficult if not impossible to obtain.

A FICO score between 620 and 650 is considered fair to good credit. But keep in mind, this range of credit scores does not guarantee you will qualify for a mortgage, and if you do qualify, it won’t get you the lowest interest rate possible. Still, to buy a home aim for a score of at least 620, recognizing that other factors weigh in the decision and that some banks may require a higher score.

With an FHA mortgage, however, a FICO score of 600 or higher is enough to qualify for the 3.5% down payment loan. FHA guidelines actually authorize this type of mortgage with a score of 580 or higher. Most banks, however, won’t approve such a loan at that credit score.

Until recently, banks were requiring a score of at least 640. Earlier this year, Wells Fargo dropped its credit score requirement for FHA and VA loans to 600. Many other banks are following suite.

What credit score do you need to get a low rate mortgage?

It use to be that a score of about 720 would yield the lowest mortgage rates available. Today, the best rates kick in with a FICO score of 760. And interest rates go up significantly as your credit score drops. To give you an idea, the following table shows current rates by credit score and calculates a monthly principal and interest payment based on a $300,000 loan:

FICO ScoreAPRMonthly Payment
760-8503.818%$1,401
700-7594.040%$1,439
680-6994.217%$1,470
660-6794.431%$1,508
640-6594.861%$1,585
620-6395.407%$1,686

Of course, the interest rates change daily, but the above table gives you an idea of the importance of a high score when you apply for a mortgage. From the top credit score range to the bottom is a difference of more than 1.5 percent. While that may not seem like a lot, it results in a higher payment of more than $250 per month. And over the life of a 30-year mortgage, a top credit score of 760 or higher as compared to a score of 620 will save you about $102,000 in interest payments on a $300,000 mortgage!

Additional Resources:

Credit Sesame: You can check out your credit score totally free (no “free” trial or credit card required).

Mortgage Rates: See today’s mortgage rates by state and for multiple types of loans.

Which FICO score do mortgage lenders use?

Credit Scores and Fannie Mae–What You Need to Know

5 Ways to Calculate How Much House You Can Afford

Published or Updated: June 3, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Jack Brosnan says:

    I appreciate the concern which is been rose. The things need to be sorted out because it is about the individual but it can be with everyone.
    ********************
    Jack brosnan

  2. Austin says:

    Those numbers are staggering. With the small difference in credit numbers so many people just don’t pay attention to how a poor credit score affects their money.

    I think this is the #1 place people should try to save money. Improve your credit score and you’ll save huge over the next couple of decades.

    Austin @ Foreigner’s Finances

  3. Deb Boden says:

    Thanks for providing a service that is actually useful without excessive ads.

  4. DebtTips says:

    Well, in the past you could probably buy a home with any credit score, it was just a matter of how much extra you would pay. Now it might be much harder but still, you need to look at much more than credit score. Contact a mortgage broker and find out how much you really qualify for, in both total amount and the monthly payment – then decide how much of that you can really afford to pay, thinking about fees, monthly bills, etc.

  5. I think that many other financial advisers do actually advocate for building or improving credit score and paying off credit card debt. It’s not only lattes and frugality.

  6. Have a good credit score is definitely money saving. Thanks to my excellent credit, last year I refinanced my mortgage on a rental property to 3.5% from 6% fixed for 30 years. That’s a saving of over $150,000!

  7. The reason for the massive differences in rates is because of the massive spike in delinquencies.

  8. Nick Tedesco says:

    The larger the purchase, the more the interest rate matters.

Speak Your Mind

*