Are you a first-time buyer looking for your dream home? Then you must have heard that your credit score is crucial. A credit score reflects your credit history, telling potential lenders how you deal with debt. Having a good credit score will make purchasing a new home far easier and more affordable. After all, the higher your credit score, the lower your mortgage interest rate. Granted, not everyone is aiming quite so high, so what is the average credit score you will need to buy a house? Let us find out.
How Does Credit Score Work?
Credit scores range from 300 to 850 and indicate how your debts are handled. The higher your credit score, the more likely lenders will work with you. For most of us, it is impossible to purchase a house without a mortgage and your credit score is your gateway to receiving approval for a mortgage. It is possible to get a mortgage even with a terrible score, but the process would be far more difficult, and you may be subjected to exorbitant interest rates. Hence, a good credit score is indispensable to the home-buying process.
In order to find out what your credit score is, you will have to take a look at your credit report.
Understanding The Process
Before you know to find out what the average credit score for your purchase is, you should understand how lenders will determine your credit score.
If you are applying for a loan by yourself, then the lender will acquire your credit score from the major credit rating agencies. They will then use the median score to assess what mortgage interest rate you qualify for.
If there is more than one person applying for the loan, the lenders will use the lowest median credit score to qualify you.
Now that you know how lenders will process your credit score, what is the average score you will need to qualify for a loan? It all comes down to the type of loan you are applying for.
Types of Loans:
- Conventional Loan
Conventional loans are loans that are not supported by any government programs. If you have a good credit score and a sufficient amount of money saved up to pay a down payment, then this is the loan for you. You will need a credit score of 620 or above to qualify for a conventional loan. Any lower than that and the chances of a credible lender approving your loan are minuscule at best. Even if you do get approved, the interest rates will be incredibly high, resulting in a heavier financial strain.
- FHA Loan
If you do not qualify for the conventional loan as your credit score is too low or you do not have enough saved up for a down payment, then consider applying for the FHA loan. The FHA loan is insured by the Federal Housing Administration and requires a minimum score of 580. As always, having a higher credit score will qualify you for a better interest rate.
- VA Loan
The VA loan is supported by the government and intended for veterans, qualified servicemember, or their spouses. There is no standardized minimum credit score so if you qualify for the loan as a veteran or service member, then you will have to send out inquiries to your local lenders to see what their credit score threshold is.
- USDA Loan
The USDA is another loan supported by the government. If you are looking to purchase a home in a qualified suburban area and your income is 115 percent lower than the median income of the area, then consider this loan. While it may vary, most lenders need you to at least have a score of 640 to qualify for this loan.