Thinking of taking out a mortgage to buy a home? You’ve probably heard you should check your credit score before you apply—but what credit score is needed to buy a home? Is yours in the right range?
Here’s everything you need to know, including why your lender might see a different score than you do, and our best tips for keeping your score in top shape ahead of a mortgage application.
Let’s start with a quick review of how credit scores work.
Credit scores: The basics
What: Your credit score is a three-digit number based on the information in your credit report. Your credit report is a compilation of details about your credit profile, including the type and amount of your current and past loans, and whether you’ve made on-time payments.
Who: There are three major credit bureaus that compile credit reports: Experian, TransUnion and Equifax. It’s up to individual creditors to provide information to these bureaus. As such, your credit report from Experian may not be identical to your credit report from Equifax. When it comes to credit scores, there are several companies that each have their own methods and models for calculating scores. For example, Fair Isaac is known for its FICO score.
Why: When you apply for a loan, the lender will gather information about you to decide if they want to lend you money and determine the terms and interest rate. Lenders typically pull your credit report and credit scores to help them make these decisions.
Credit scores: The details
It’s easy enough to understand how your FICO score might be different from your VantageScore, for example, since each company has its own proprietary scoring model. Your score can also differ depending on which credit bureau’s report was used as the reference point.
But did you know that you actually have multiple scores from each company, based on the same credit report?
That’s because credit reporting companies offer lenders different scoring models to reflect specific industries and loan types. The scoring models have a similar underlying foundation, but each has been tweaked to better reflect customer behavior in certain scenarios. If you’re an auto lender, for example, you might rely more heavily on the FICO “Auto Score 8” while a credit card issuer would prefer to use the FICO “Bankcard Score 2.” Mortgage lenders also have their preferred scoring versions.
If you’ve recently checked your credit score, there’s a decent chance the number you saw won’t match up exactly with the number(s) your mortgage lender will rely upon. It’s still a good idea to check your credit score, though, so you can know (approximately) where you stand before applying for a mortgage.
Why is your credit score important?
Simply put, a better credit score can save you a lot of money. While multiple factors go into determining the terms of your mortgage—like your income and other debts—your credit score is a key piece of the puzzle because lenders view it as a key measure of how likely you are to be able to pay back your loan. A higher credit score is a strong indicator of ability to repay and, as a result, may lead lenders to offer you better terms for your loan.
Let’s say you’re applying for a 30-year fixed mortgage in California with a principal amount of $400,000. Check out these sample loan calculations:
- If your current credit score is between 680 and 699: Your annual percentage rate (APR) might be about 3.88%. This means your monthly payment would be $1,883, and the total interest paid over the life of the loan would be $277,554.
- What if your score was better? If your score improved to between 700 and 759, your APR could improve to about 3.71%, reducing your monthly payment to $1,843 and your total interest paid to $263,621. That’s a savings of nearly $14,000!
What credit score is needed to buy a house?
As we outlined above, a higher credit score can help you secure better mortgage terms. But what about the lower end? Most lenders have a minimum credit score requirement. At Clara, we lend to borrowers who have a score of 620 or higher. 620 is a common threshold because that is the minimum score required for many conforming loans.
What is a conforming loan? Loans can be repackaged and sold on the secondary market—and government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac are big buyers. But GSEs only buy loans that meet their standards. When a loan adheres to these standards, it is considered a conforming loan.
If your score is below 620, you may still be able to get a mortgage—though your interest rate may be higher and you may be required to pay for mortgage insurance regardless of your downpayment amount.
How can you get your credit score in top shape before applying for a mortgage?
Improving your credit score can mean saving serious money over the life of your mortgage. Here’s how you can make sure your credit score is in top shape before you apply:
- Check your credit reports regularly. You’re entitled to a free copy of your credit report every 12 months from each bureau. Scour them for any errors or inaccuracies, as these could drag down your credit score. You can dispute any issues online, over the phone or by mail.
- Consider holding off on any other new loans. When you apply for new credit, a hard inquiry is usually recorded on your credit report, which can ding your score. Plus, new debt brings down the average age of your credit accounts—another move that can hurt your credit score.
- Make on-time payments and reduce your credit card balances. These are two majorly influential factors for credit scores—so be sure to put your best foot forward.