Credit Score for Home Loan 101: What Smart Buyers Need to Know
Three little digits stand between you and your dream home: The dreaded credit score. Learn here the required credit score for home loans.
When it comes to buying a home, your credit score packs a big punch. That little three-digit powerhouse helps determine both your eligibility to get a mortgage, and how much you’ll pay for that mortgage over time. Before even going to open houses, it’s smart to understand first what qualifies as a good credit score for home loan and how it impacts mortgage options, interest rates, and overall affordability.
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Most first-time homebuyers feel understandably apprehensive about this whole credit score thing. In fact, gearing up to buy a home might be the first time you’ve really thought about your credit score in, well, ever.
You may have questions, such as: What exactly goes into your credit score? What credit score do you need to get a home loan? Why do lenders even care? And what can you do if you have no or low credit?
Worry not; we’ve got answers! We talked to top experts to find out everything you need to know about your credit and buying a home.
So without further ado, let’s break it all down.
What’s a credit score?
Your credit score is a three-digit number — ranging from 300 to 850 — that represents how well you manage and pay off debts.
Lenders use this score to decide whether to loan you money. The higher your credit score, the more likely you are to be approved for loans and lines of credit, and the better rates and terms you’ll be offered. If you have low or no credit, it’s much more challenging to borrow money.
There are three main companies — called credit bureaus — that measure and track credit scores: Equifax, Transunion, and Experian.
“They monitor your debt — what you owe, what you pay, if you’re on time, the frequency of your payments,” explains real estate agent Lynn Carteris who’s with the Oldham Group serving the San Francisco Bay area in California.
That information is then aggregated and used to calculate your three-digit credit score, a number lenders can use to quickly evaluate your creditworthiness.
Who calculates credit scores?
The most commonly used credit score among lenders and creditors is the FICO score. This is known as the industry standard in the mortgage world. Another popular credit score is VantageScore, though it’s less commonly used in home lending.
FICO and VantageScore calculate credit scores differently, so you can expect some variance in your scores for each.
FICO Score
- 300 to 579: Very poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very Good
- 800 to 850: Exceptional
VantageScore
- 300 to 499: Very Poor
- 500 to 600: Poor
- 601 to 660: Fair
- 661 to 780: Good
- 781 to 850: Excellent
If you’re planning to buy a home, it’s probably best to focus on your FICO score for now. Ideally, you want to be in the Very Good range, as that’s where you’ll get the best mortgage rate. However, you can get a loan even with Fair credit. We’ll get to all that soon.
