While there are many factors to buying a home, one that looms large is your credit score. Your credit scores will partly determine how much interest you will pay over the term of the loan. This article will cover what the ideal credit score to buy a home currently is, and what that trend looks like for 2022.
It’s Not Impossible Determine the Ideal Credit Score to Buy Property!
Nearly all home lenders use some version of the FICO score. This is important to understand as scores you can find on Credit Karma and sites like that are not used by any home lender. Additionally, unlike many credit applications or auto loans, home lenders WILL run all three of your credit reports and scores. It is in their best interest to make sure your finances are in order. Additionally, they may ALSO run your LexisNexis report. But what is the scoring range you should be targeting?
- 800 or higher: Exceptional!
- 740-799: Very good!
- 670-739: Good.
- 580-669: Fair.
- Below 580: Poor.
But How Does Credit Scoring Impact Your Interest Rates, You Ask?
This question is best suited for a loan officer, but there are fundamentals you need to know in advance. First, your credit score and profile will determine which loan is best suited for your need. FHA, for example, has a minimum score requirement of 580 but lenders often will not loan to anyone below 640. In other situations, a lower score can be overcome by putting more money down. The REAL factor here, however, is your score impacts the interest you pay.
Let’s say you are looking at a $200,000 home. Over the course of 30 years, a half percentage point difference could cost you well over $20,000 dollars of interest. Simple math has you paying over $50 a month extra for a half percentage point. This makes it essential to get your credit in the best shape possible before looking for a home.
MyFICO Has The Tools to Help!
I often talk about my time working on the MyFICO credit forum. I learned so much about credit rebuilding, credit scoring and even home purchasing there. They have a calculator that will give you the basics on how much you can save over the term of a loan based on your credit score. Here is an example, factoring a $300,000 loan principal. This does not factor in escrow and taxes, just the home payment. Do not consider this “monthly payment” what you could expect to pay in your location, as local factors will change this.
| FICO score | APR | Monthly payment | Total interest paid | Price changes |
| 760-850 | 2.695% | $1,216 | $137,761 | If your score changes to 700-759, you could pay an extra $12,752. |
| 700-759 | 2.917% | $1,251 | $150,512 | If your score changes to 760-850, you could save an extra $12,752. |
| 680-699 | 3.094% | $1,280 | $160,826 | If your score changes to 700-759, you could save an extra $10,314. |
| 660-679 | 3.308% | $1,315 | $173,468 | If your score changes to 700-759, you could save an extra $22,955. |
| 640-659 | 3.738% | $1,387 | $199,430 | If your score changes to 660-679, you could save an extra $25,962. |
| 620-639 | 4.284% | $1,482 | $233,447 | If your score changes to 640-659, you could save an extra $34,017. |
Minimum Credit Score by Mortgage Loan Type
There are many flavors of lenders and loans, from high reputable to downright sketchy. You should rely on your realtor through this process, as they often work with trusted lenders. Bot only that, but your realtor generally has your best interests in mind. As far as lenders, I have used the same loan officer for both of my home purchases. Relationships are key in the home purchasing process, and they will help you determine the ideal credit score to buy a home.
- Conventional: Often a lender will accept a credit score as low as 620 for conventional loans. The lower the credit score, the more requirements there is for those borrowers, such as higher income or more reserves.
- USDA Loans: These types of loans are backed by the U.S. Department of Agriculture. This is a loan program for low- to moderate-income borrowers purchasing a home in a rural area. Borrowers generally need a minimum score of 640 to qualify for a USDA loan. There are situations which USDA will consider sub-640, but that should be your target
- VA Loans: These types of loans are backed by the U.S. Department of Veterans Affairs, VA loans are offered to active and veteran military personnel and their families. There is no official minimum score for these loans, but since the housing crisis of 2007 it has been generally 620 for MOST lenders.
- Jumbo Loans: These are higher risk to the lender because they can exceed conforming loan limits, currently $548,250 in most markets, and those with bad credit will not qualify. Most lenders require a credit score of 720 for a jumbo loan.
Touch Up Your Credit Before Home Purchase!
I wrote an article late last year on having your credit home purchase ready. This is so important prior to purchasing a home and I encourage readers to take a look. It covers essentials but there are quick bullet points we can talk about here.
- Dial your score in using AZEO: This is a very specific way to dial in your credit scores to optimal when it comes to credit card usage. Revolving credit counts for 35% of all FICO score models. If you can afford it, you should attempt AZEO three months before you apply for a mortgage. It is specific however, so read the article. If you do not want to go to those extremes, simply paying down as much revolving debt before hand is important.
- Work To Remove Any Negatives: This is a no brainer, and there are many articles on this website to help your figure out how to remove all kinds of negative items.
- No New Credit or Trade Lines: Do your best to avoid taking out new loans or credit for a year before purchase. I understand this isn’t always plausible, but it will help your overall approval.
The Ideal Credit Score to Buy Is Just Months Away!
When purchasing a home, the ideal credit score to buy is determine on the loan you are looking to achieve. The reality is you should plan for at least three months to get your credit in tip top shape before applying. Understanding the limitations and time constraints on some of the credit optimization is important!
