Whether hosting a webinar or speaking at a homebuyer workshop, the #1 question I get asked is what’s a good credit score to have when looking to buy a house? Of course, this answer depends on several factors concerning your financial profile, but I’ll keep things simple and focus on the type of mortgage loan you are looking to obtain.
Why Do I Need to Know About Different Types of Loans?
Different loan types have different guidelines for loan approval. Therefore, the credit score requirement differs from one loan type to another. Also, lenders may have additional requirements that differ from Fannie Mae’s or Freddie mac’s guidelines.
Your credit score isn’t the only factor that determines your interest rate.
Conventional Loan
The good’ ole conventional loan is a mortgage that is not secured or backed by a government entity. Therefore, the guidelines for a down payment, DTI, credit score, etc., tend to be more stringent than what a potential borrower would find in government back loans such as the FHA or VA loan. Therefore, if you are looking for favorable interest rates, I suggest a credit score of 680 and above for a conventional loan. Anything lower than this, and you may suffer some penalties. For example, compare what it may cost Borrower A, who has a 640 credit score, vs. Borrower B, who has a 680, in which both are looking to obtain a 4.250 interest rate for a loan amount of $261,250
Borrower A is charged 1.687%, which is $4407
Borrower B is only being charged 0.187 of $261,150, which is only $489
Rates change every day when the markets are open, but you can see what score puts you in a more favorable position in this simple example. And some may ask, should you wait until your credit score is a 680? Well, that ultimately depends on your circumstance. So, I iterate never disqualify yourself; always speak with a loan officer to determine the best course of action. (Click here to learn about 3% down conventional loans)
FHA Loan
If you’re not looking to break every piggy bank in the house and you’re rebuilding your credit score, then the FHA loan may be your best course of action. You’d go further with a 640 credit score via FHA than with a conventional loan. The FHA loan—a government-insured loan—is designed for borrowers with lower than average credit scores and who may not have significant reserves for a down payment. Thus the penalties aren’t as severe for having less than excellent credit. Although a 640 isn’t as penalized in today’s covid climate, I would still love to get a client to 660 if possible if they seek an FHA.
Borrower A 640
Borrower B 660
VA Loan
VA loan is another government-backed loan, but it is designated for military personnel and does not require a down payment. That’s right! The VA Loan has a 0% down payment for all qualified veterans. The process of obtaining a VA loan is a little different from other loans, but my recommendation for credit score is the same as it would be for an FHA loan 660.
My rule of thumb when preparing to buy a home is to stay informed and proactive about your credit score. Therefore, you can take the necessary steps needed to get your score as high as you can get it before you look for a pre-approval from a lender.
