What is a Good Credit Score to Buy a House in 2023
Dena Standley | June 09, 2023
Edited by Hannah Locklear
Summary: Consumers feel the pinch of a hot real estate market and climbing interest rates in 2023. Those relying on conventional mortgage loans can qualify with a credit score of 620. Securing a mortgage and reasonable interest rates takes more than the minimum qualifying credit score. Let’s explore.
When securing a mortgage, lenders are bound by specific rules when it comes to credit scores and other factors. There are a variety of loan types, but the two most common types of mortgage loans are conventional and FHA. Conventional loans typically require a 620 minimum credit score. If your score is lower than 620, you may not qualify for a loan or be forced to pay a larger down payment on top of paying a high-interest rate on the loan.
The Federal Housing Administration (FHA) provides mortgages for home buyers that are backed by the government and often provide a path to homeownership with credit scores as low as 580 and looser debt-to-income ratios.
Let’s explore the difference between FHA and conventional loans and discuss the optimum credit score for getting a mortgage for your dream home.
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Conventional mortgage loans
The government does not secure conventional loans; therefore, conventional mortgage loans usually have more stringent qualification criteria. A credit score of 740 and a good debt-to-income ratio will secure you the most favorable terms offered by a lender.
Most conventional home loans conform to the requirements and limits set by the Federal Housing Finance Agency (FHFA), which follows the down payment minimum and credit score requirements of Fannie Mae and Freddie Mac. Along with a good credit score, the following items also help ensure you can get the best mortgage for your needs:
- A down payment of at least 5% of the total cost of the house. Lenders want to know that you are invested in the property, and a higher down payment can help ensure the best terms.
- A debt-to-income ratio below 43% is usually required. To determine your debt-to-income ratio, calculate your net monthly income and then determine what percentage of that income you use to satisfy payments on debt. Ideally, that number should be below 36%. Learn more from SoloSuit about how debt can impact your ability to buy a house.
- You will need proof of stable income. Some lenders prefer to see that you’ve worked in the same industry for at least 18 months.
- Lenders also want to see that you have adequate income to afford the mortgage you are pursuing.
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FHA makes mortgage loans more accessible
The FHA insures mortgage loans, allowing lenders to offer loans to those with lower credit scores, and often requires smaller down payments and lower closing costs. The FHA also provides mortgage loans on manufactured housing and mobile homes which are sometimes difficult to finance with a conventional loan.
If you have a credit score of 580 or higher, you can often get an FHA loan with as little as a 3.5% down payment. For credit scores from 500-579, most FHA loans will require at least 10% down. However, there is a downside to FHA loans.
FHA loans require that all borrowers buy private mortgage insurance (PMI), which can result in significant up-front fees at the time of closing, as well as a monthly premium added to your mortgage. PMI is a tool to protect the lender’s interest and does not protect you from foreclosure if you fall behind on mortgage payments.
FHA loans have established loan limits depending on where the property is located. This limit can make it hard to find a home in your price range in some markets across the country. Visit the FHA search tool to learn the maximum mortgage amount for your area.
The FHA also lacks diversity in the type of loans offered. Typically, buyers qualify for a standard 15-year or 30-year fixed-rate mortgage. While this may suit your needs, some circumstances require more flexible mortgage options.
You may qualify for other common mortgage loans
The Department of Veterans Affairs offers VA loans for those who’ve served in the military and National Guard and meet the service requirements. VA loans help veterans purchase homes with low down payments and are also a good option for those who may not meet the requirements for a conventional loan. There is no official minimum limit for a VA loan, but most lenders who offer these loans prefer to work with those that have at least a 620 credit score.
As with an FHA loan, VA loans come with PMI requirements that can add substantial costs to the overall price you pay for a home.
There are other types of mortgages available, such as adjustable-rate mortgages and jumbo loans. Do your research carefully before applying for any mortgage to ensure you understand the fine print and the pros and cons. It’s easy to get carried away when house–fever hits, but a mortgage is likely one of the largest purchases you will ever make. Educate yourself, and allow SoloSuit to help you understand and maintain your overall financial health.
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