Credit Score Needed to Buy a Home in 2016

Anyone looking to purchase a new home should be very interested to know their credit score. After all, it’s integrally linked to today’s home buying process.

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Your credit score plays a larger role in your ability to purchase a home now than ever before.

Decades ago, credit score was much less of a factor in whether you could, or could not, purchase a home but that’s not the case in 2016.

Credit Score Survey Results

A new survey by Experian targets current thoughts on credit scores. Here are some highlights before the full survey is released later today on their website.

  • 34% of future home buyers say their credit score might hurt their ability to purchase a home
  • 45% have delayed purchases to improve their credit score
  • 60% are actively paying off debt
  • 28% are purposefully keeping their credit card balances low
  • 15% are protecting their credit information from identity theft

From the Experian press release:

“Your credit profile is one of the factors that can have a substantial impact on securing a home loan because it is used by lenders as an indicator of your financial health,” said Rod Griffin, director of Public Education at Experian. “Consumers planning to purchase a home should check their credit scores and reports to see where they stand. From there they can develop a financial plan so they are in the best place to try to secure the loan they desire.”

I think it’s safe to say that we are aware of the importance of a good credit score, especially as it relates to buying a home.  But what exactly are some reasonable goals? Is it possible to purchase a home with a low credit score? What exactly is a low credit score?

You’ve come to the right place to get answers to these questions and more.

Current Credit Score Minimums

In order to qualify for an FHA Loan, here are some guidelines from Credit Requirements for FHA Loans.

  1. If you plan to make the lowest down payment possible, currently 3.5% of the home’s sale price, then your credit score must be at least 580.
  2. If your credit score is lower than 580 then the down payment would need to be at least 10%.

Note: Keep in mind, these are guidelines and are not set in stone. Lenders do have the discretion to require more rules or fewer rules for their clients; balancing risk and reward in the free market.

When looking at Conventional Loans that are backed by Fannie Mae or Freddie Mac, the minimum score required is set at 620. Most of the time, the borrower can get a better interest rate with a Conventional loan and there are fewer requirements when it comes to the home itself.

But I did just say “most of the time.” This underscores the importance of finding a trusted loan specialist. Great Realtors know the basics of home loans. Loan specialists are the true experts in current rules, rates, and regulations.

When generically asking, “What credit score is needed to buy a home?” If yours is 660 or higher, you are in good shape. Lenders see that you are reasonably on top of things and are quite likely to offer you a loan.

Of course, a credit score of 700 or even 800 is even better as lenders will court you with a lower interest rate.

If you are someone who has served our country in the military, you likely qualify for a VA loan. The Department of Veterans Affairs (VA) offers specialized deals for their members, many times with a zero-down option. For more info, head over to this VA Loan Primer.

Steps to Improve Your Credit Score

What if you find that your credit score is less than ideal? Here are the five main things to work on. They are ranked in order of importance.

1. Payment History

Making timely payments is key to having a top-tier credit rating. It all starts by not biting off more than you can chew but after that, when the bill says “Due Date” take that very seriously.

2. Amounts Owed

You might have thought this should have been first, right? Actually, it’s second, which could be a good thing. Your FICO credit score looks at how many lines of credit you have and the balance on each. Make a plan to regularly reduce your debt and that will greatly enhance your score.

3. Length of Credit History

The longer you’ve been using credit is seen as a good thing by this calculation. Go figure!

4. New Credit

Each time you open a new source of credit, your score takes a hit. I’ve heard other Realtors tell horror stories about how one of their clients bought some new furniture with “90 days same as cash” before the closing. Of course, this lowered their credit score below the required baseline and thus, killed the deal.

5. Types of Credit Used

Lastly, your credit score takes into consideration all of your credit cards, store accounts, and other loans. It looks at the number and makeup of your complete credit landscape.

Taking proactive steps to improve each of these five items will improve the credit score needed to buy a home.

Additional Help

If you’re a first-time home buyer, this may seem like a daunting task. Never fear! I’ve put together the Top 10 Tips for Louisville First Time Home Buyers full of great information, just for you.

Still have questions? If you live in Louisville or are considering a move to our great city, please contact me! I’m always happy to help.