What Credit Score Do I Need to Buy a House?

I’m about to finish my debt management program, so I wanted to focus on my next goal to buy my first home. But I’m not sure that my credit score is high enough to qualify. What credit score do I need to buy a house? And how long will it take to fix my credit?

Stacy J. from San Diego, CA

How can a HUD-approved housing counselor help?

Traditional mortgages are not your only option for financing a home. You may qualify for FHA loans, loans through the VA, or for valuable down payment and closing cost assistance programs. All these solutions make it easier to overcome the common barriers to becoming a homeowner. But most homebuyers don’t know all the various options that exist.

In fact, in the case of down payment and closing cost assistance, these programs can be specific to certain states, counties and even towns. FHA lending options can also vary by lenders in your area. So, you need an expert that understand the financing options available where you live. HUD-approved housing counselors fill that role.

So really, what credit score is needed to buy a house?

FHA Financing Rules

According to HUD’s official rules, you can get an FHA loan as long as your FICO credit score is above 500. However, if your score is between 500 and 579, it means you must make a down payment of at least 10%. If you want to qualify for the FHA’s 3.5% down payment, then you must have a credit score of at least 580.^[1]

How does credit score relate to qualifying for a home loan?

A mortgage lender looks at your credit score to assess your risk as a borrower. A high credit score means you are more likely to make your payments on time. A low credit score means you are more likely to default.

If your credit score is too low, you simply won’t get approved for a home loan. However, credit score matters for more than just mortgage approval. Your score also factors into the interest rate that you qualify for on the mortgage. A low score means a higher rate.

Interest rate matters because it ultimately determines the total cost of financing your home. Just one percentage point higher equates to thousands of dollars more in interest charges paid over the life of the loan. It basically costs you more money to borrow if you have a low credit score.

Interest rate also affects your monthly payment requirements. A lower rate means lower monthly payments. That makes it easier to afford your mortgage payments so you can avoid default and foreclosure.

This is why you want the highest score possible when you apply for a mortgage. So, even if you can qualify for a mortgage, you may want to hold off while you build credit.

A housing counselor can also help you make an effective action plan for buying your home at the right rate.

How long does it take to build credit?

The amount of time it takes to get your score where you want it depends on where you start and what score you want to achieve. Moving from a bad credit score (500) to a fair credit score (600) can take as little as six months to a year. It all depends on how many negative items you have on your credit and how proactive you are in your strategy to build credit.

Of course, the higher your score is, the harder you need to work to improve it. Going from bad to fair takes less work than moving from good (650) to excellent (700+). So, you must tailor your timing expectations to fit your credit goals.