The Credit Scores You Need to Buy a House in 2023

With rising interest rates and stricter borrowing standards having good credit is necessary to secure a home loan in 2023

With the Federal Reserve raising interest rates to curb inflation banks will be raising the rates on mortgages and make it harder to qualify for one due to the risk of lending. While typically the minimum credit score for mortgage approval is about 620, and some options in the 500 range with some government backed loans, you shouldn't count on minimums to get you approved anymore.

In order to get approved for a home, as well as save as much money as possible on interest for your mortgage it's important to look at the minimum credit score requirements for each type of home loan, what the average credit score for a home loan is at this moment in time, and what the economic trends of recent times tell us.

What's the average credit score for buying a house?

According to the Federal Reserve Bank of New York the median credit score for new home loans in August of 2022 was 773. While this seems extremely high it is important to remember that this data includes a significant portion of people applying for a mortgage as a home refinance, which was driven by interest rates being so low from 2020 until 2022.

Given this it is important to remember that this doesn't mean that you need a 770+ credit score to purchase a home, especially if you are a first time home buyer, where you can take advantage of government backed programs like FHA loans.

However in order to save the most money on interest and get the best rates outside of first time buyer programs you should aim to apply for your home loan with a credit score in the 680+ range.

Conventional Loans | 620-640

Conventional loans are best suited for borrowers with higher credit scores, more mature credit profiles, and money saved up for an ideal down payment of 10-20%. It is recommended that borrowers have a credit score of 620 or higher when applying for a conventional loan. If a borrower's score is below 620, they may not be approved for the loan or may be required to pay a higher interest rate.

These home loans are the ones offered by the majority of banks or lending institutions that are willing to offer mortgages. When shopping for a conventional mortgage it's best to compare options since there are typically many, and see which lender can offer you the best terms and interest rates.

FHA Loans | 500-580

An FHA home loan is a government-backed home buying program that offers mortgage loans with more accessible terms than buying from traditional lending institutions. FHA loans are popular with first time home buyers due to their accessible terms but they aren't limited to first time home buyers.

You can qualify for an FHA loan even if you aren't a first time home buyer but you can only have one FHA loan open at one time, this is to prevent people from leveraging the program as a way to purchase property for leisure or investment.

FHA loans have a few requirements if you'd like to get one. Review them below:

  • Credit Score: In order to qualify for a 3.5% down payment your score needs be at minimum above 580. You can still qualify for an FHA loan with a score of at minimum 500 but you will have to make a 10% down payment and approval is not a guaranteed in this case
  • Down Payment: As just mentioned your down payment with an FHA loan can range anywhere from 3.5% to 10% depending on your credit. For a nationwide median home price of $440,000 in 2022 that would mean a down payment of $15,400-$44,000
  • Debt to Income Ratio (DTI): To calculate DTI add up all your monthly debt payments and divide the total by the gross amount of income you earn every month and multiply it by 100 for a percentage. To qualify your DTI should be no larger than 50% with an ideal being in the 40%-45% range.
  • FHA Loan Limits: Referring to the US Department of Housing and Urban Development the maximum amount you can borrow depends on the cost of housing in a specific area. For low cost areas the limit is $420,680 and for high cost areas the limit is $970,8000. This varies by state and county.
  • Residential Use: FHA loans are only applicable for residential properties and will not be granted to investment or vacation properties.
  • FHA Inspection: Before being approved for an FHA loan an FHA appraiser will evaluate the property according to a set of safety guidelines.

There can be more requirements that are added by lenders on top of those required for an FHA loan, it's important to check with multiple lenders to determine what lender will be your best fit.

VA Loans | 580-620

VA loans are backed by the Department of Veterans Affairs and are available to active-duty servicemembers and veterans.

Because the VA guarantees its loans against losses, mortgage lenders offer VA loans at very low-interest rates, oftentimes these are the lowest interest rate loans available.

VA loans also don't require a down payment meaning that the mortgage can be 100% of the home price. However in order to obtain a VA mortgage loan a Certificate of Eligibility (COE) is required.

USDA Loans | 620-640

USDA mortgage loans are available for homes outside of densely populated areas of the United States. Despite that, USDA loans are still applicable to over 90% of the land in the United States.

This includes rural areas, small towns, and many suburbs, but exceptions can be made for home buyers with extenuating circumstances. USDA loans like VA loans don't require a down payment, and on average the interest rates can be 0.5% less than conventional loans at any given time.

Jumbo Loans | 700+

Jumbo loans are for home buyers whose mortgage loans are too large for the local mortgage loan limit. There is no specific credit score requirement for a jumbo mortgage, but higher scores are more likely to be approved.

Most lenders require a credit score of 700+ in order to be eligible. VA Jumbo loans may be available at credit scores of 640 and above. In order to be assigned a lower interest rate it's best to count on needing a score in the 700+ range.

Jumbo loans can be used for a variety of property types, and have been used for primary residences, along with leisure properties like vacation homes, or properties that serve as an investment.

How to improve credit score for a home loan

In today's economic climate it. may very well be that you see yourself falling short of the required credit or Fico score needed for a home loan. However all is not lost, you can follow some guidelines that will outline how to have the credit to buy a house.

Through following a few simple steps you can improve your credit score by quite a lot in a short period of time. A few things that can help improve your credit score include: keeping your balances on credit cards low (under 30%), paying all your bills on time, and opening new accounts that will report beneficially to the credit bureaus.

Following this it's important to let your beneficial accounts mature in good standing, having long history of on time payment history and responsible usage will have your credit score improving very quickly.

Many of the strategies you will see here are used by Ava's products which cover 90% of the factors that affect your credit score. If you'd like to see how Ava can improve your score in as little as 30 days check out https://meetava.com.

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