Is Your Credit Score Good Enough to Buy a House?

Photo illustration to accompany article on how good your credit must be to buy a house Clint Branch and Shutterstock

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Your credit score is a huge factor when you buy a house. Mortgage lenders and banks use it when considering what loan you may qualify for — or whether you’ll qualify at all. 

So what is a good enough credit score to buy a house? 

It’s not so much that you need a certain score. It’s more important to know how your score will affect the rate, loan amount, and down payment you’ll be asked for.   

What’s more, the standards of mortgage lenders aren’t the same as they were before the COVID-19 pandemic. Many are asking for higher credit scores and bigger down payments. Overall credit availability dropped in both March and April, according to an April report from the Mortgage Bankers Association, an industry trade group.

“Credit standards are tightening because the economic landscape is changing so quickly,” says Greg McBride, CFA, chief financial analyst for Bankrate.com. 

Whether you’re looking to buy a house in the next few months or the next few years, the benefits of checking in on your credit score — and taking steps to improve it — will pay off in the long run.

What Credit Factors Are Home Lenders Using?

Your credit score is influenced by multiple factors, from how quickly you pay your bills to how long you’ve owned a credit card. To access your credit score, check your credit card statement or online bank account. If you can’t find it, use the help feature on the bank or issuer’s website to get assistance.

Your credit score will have a significant influence on your mortgage’s interest rates, and therefore the monthly payments you’ll make. The chart below shows how a range of scores might affect the payments on a 30-year fixed-rate mortgage. 

FICO score range 620-639640-659660-679680-699700-759 760-850
 APR4.591%4.045%3.615%3.401%3.224%3.002%
$100,000 loan$512$480$455$444$434$422
$200,000 loan$1,024$960$911$887$868$843
$300,000 loan$1,536$1,440$1,366$1,331$1,301$1,265
$400,00 loan$2,048$1,920$1,822$1,774
$1,735$1,687
$500,000 loan$2,561$2,400$2,277$2,218$2,169$2,109
*Based on national mortgage rates as of May 27, 2020

Your credit score isn’t the only factor that will be used to evaluate you. Here are some of the most common things that lenders will look at when determining your creditworthiness.

Payment history

If you request your credit report from one of the three major credit bureaus — Experian, Transunion, or Equifax — you’ll see much of the report is a summary of your monthly bills and when they were paid. If you pay your bills on time every month, you do not need to worry about this aspect of your credit rating. If you’re late or pay less than the minimum, you’ll see that noted on your report. Your payment history makes up 35% of your FICO score.

DTI ratio

Debt-to-income ratio (DTI) is a simple calculation. To determine this number, take all your debt obligations and divide that number by your gross income. “This is important because it will show how much debt you are capable of handling,” says Molly Ford-Coates, president of Ford Financial Management LLC, an online financial counseling agency. “Including housing expenses, this ratio should not exceed 35% of your gross income. If you are pushing this percentage amount without a mortgage, it may be harder to qualify and/or you may have a high-interest rate.”

How much credit you’re using

The amount of credit you’re using also plays a role in your credit scoring. Similar to DTI, this ratio calculates the amount of debt you’re currently carrying compared to your available credit line — or if it’s a car or student loan, the amount of the original balance. For this reason, any long-term debts you can clear up before you meet with your mortgage lender will play a role in determining how much you’re able to borrow.

Employment history

Although your employment history isn’t part of your credit score, it is an important element to ensure lenders look positively on your application for credit, says Andrew Helling, a real estate agent and editor of REthority.com, a website specializing in real estate content. “Lenders typically seek at least two years of employment history, though it’s not necessary to be at the same employer for those two years. You just need an established work history of two years.” If you’re self-employed, you’ll need two years of steady income reported on your tax return to appeal to a lender. “They want to ensure your income is steady to establish your ability to pay for a loan in the future,” Helling says.

Down payment amount

A good rule of thumb is to put down 20% of the purchase price as your down payment. 

People who put down 20% “will get more favorable terms, including lower interest rates and even a lower loan origination fee,” Helling says. The reason is simple. “Borrowers who bring more cash to the table have more equity in their home, which means they’re more likely to protect their equity by making their payments on time.” 

Now, more than just a rule of thumb, 20% may be a requirement. In April, for example, JPMorgan Chase changed its requirement for new loans to a credit score of 700+ and 20% down for new loans. The Federal Housing Administration (FHA) also warned this spring that lenders are asking for higher down payments. FHA loans, the most common type of loan used by first-time home buyers, traditionally required as little as 3.5% down for those with a credit score above 580. 

Those who can’t put down 20%, but still qualify for a mortgage, could add private mortgage insurance (PMI) to their loan, but it’s an additional cost that needs to be weighed against your budget and goals. 

Pro Tip

Start by checking your credit report to make sure it’s accurate. If it’s not, use this email template to fire off a request to fix it.

What Do I Need to Do to Prepare? 

Whether you have a credit score of 850 or 550, there are several steps you can take to prepare yourself to meet with a mortgage lender as you begin your search for a new home. Improving your credit isn’t a one-and-done project, but rather something you can and should be doing at all times to be better prepared for significant purchases.

Pay down long-term debt

If you can pay down any long-standing debts, such as student loans or car loans, before you meet with your mortgage lender, it’s a good idea to do so. For one thing, it’s one less headache to worry about. For another, by closing out debt, you’re making it clear to your lender you have no problems with making monthly payments. “By paying down a car loan on time, you’re showing the bank you are a responsible borrower,” Helling says.

Pay more than monthly minimums

If you’ve maxed out your credit card in the past, now is the time to take control of the situation. “Make more than the minimum payment due each month,” says Lisa Torelli-Sauer, editor at Sensible Digs, a website specializing in budgeting home investments. “Even if it’s only a few dollars more than the minimum payment, it will show the credit reporting agencies you are making a greater effort to pay down your debt and will improve your score.” 

Don’t close out paid-up credit cards

Another tactic to help convince lenders you’re a good risk, says Torelli-Sauer, is keeping credit accounts open after you’ve paid them off, even if you don’t plan to use them anymore. “A long-standing loan or line of credit shows a positive consumer-lender relationship and improves your credit score. Even if you pay off your credit card or line of credit, don’t close it. The longer it’s listed on your credit report, the more it will help your credit score.”

Monitor your credit reports

Each year, you’re entitled to one free credit report from each of the “Big Three” credit bureaus — Experian, Equifax, and Transunion. And in light of the pandemic, you can view your report for free weekly through April 2021. It can pay off big time to get those reports and read them carefully, according to Karra Kingston, a New York bankruptcy lawyer. Why? Because even credit bureaus make mistakes, and a mistake on your credit report could cost you a mortgage. “You should always be up-to-date on what has changed and why something has changed,” Kingston says. 

The bureaus make it possible to fix errors in your reports with online forms you can fill out and submit. There are also a number of for-profit companies that will monitor your credit and alert you if there are significant changes, but in most cases you’ll be able to do this monitoring yourself for free.

Be fiscally conservative

If you’re planning on applying for a mortgage in the near future, now isn’t the right time to splurge on that great stereo system you’ve been eyeing or open a new credit card account, says Matthew Martinez, an investment real estate broker and certified property manager with Diamond Real Estate Group, based in the San Francisco Bay area. “It’s a good idea to cut your spending, decrease your debts, and avoid hard credit inquiries and big purchases when you’re getting ready to purchase a home,” he says. Hard credit inquiries are made by financial institutions when they check your credit before you apply for a loan or credit card. Your consent is required, and the inquiry is included in your credit report and can affect your final score. 

Keep everything organized

This matters more than you might think, Helling says. Lending agents, after all, are only human. If you show up at a mortgage meeting with slips of disorganized financial information sticking out of envelopes and overflowing from your briefcase, they may question your ability to pay back a loan in a timely manner. “Lenders have a lot of paperwork to get through, and giving them an organized list of income, expenses, and more will help expedite their approval process. Consider your documentation a road map of your finances,” Helling says.

Why This Is Important 

Each lender has its own formula for determining where the cutoff point is in a credit score. As the experts will tell you, the better your credit rating, the more likely you are to get a low-interest rate and favorable terms when you apply for a mortgage. Someone with a credit score of 850 is very likely to find they will pay less per month than someone with a comparably priced home, but a lower score of 680. 

Take steps to improve your credit score. Improving your score will help you thrive financially when you find the house of your dreams. If you are credit-ready, don’t let the news of higher credit standards scare you from buying now. No one knows if, or when, lending standards will change again. These standards may be the new normal.