Credit Score Needed to Buy a House

The credit score required for buying a home by availing a mortgage depends on factors like gross income of the borrower, the loan-to-value ratio, the debt-income ratio, the amount of down payment, the amount of loan availed, the borrower's credit history, the state of the economy and the type of loan that the aspiring homeowner would like to procure for the sake of buying a home. To arrive at the credit score needed to buy a house, one would have to examine each of the aforementioned factors. Nevertheless, one can safely conclude that a significant down payment and a high credit score are essential for availing a home mortgage at a favorable rate of interest.

What is the Minimum Credit Score needed to Buy a House?

Although every consumer has three credit scores, these do not vary greatly and are influenced more or less to the same extent by common factors. Hence, it is sufficient to examine factors that influence a single credit score.

Prior to the sub-prime crisis, credit was cheap and people believed that home prices would always increase. Hence, even people with credit scores of 620 and less, could qualify easily for home mortgages. The inability to down pay the requisite 25 percent of the purchase price of the home was again not a deterrent to availing a mortgage at a reasonable rate of interest. It goes without saying that the loan-to-value ratio, the debt-income ratio and the borrower's credit history were not of much significance when it came to availing non-conforming mortgages. Surprisingly even conforming mortgages, viz. mortgages securitized by Freddie Mac Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) had lax lending standards. In fact, Fannie Mae and Freddie Mac had to be placed under conservatorship, since both entities were highly leveraged with leverage ratios of 20:1 and 70:1 respectively, thus making them incapable of handling defaults. Since, these defaults were a consequence of bad credit consumers being unable to keep up with mortgage payments, the credit requirements have been tightened.

Today, a borrower needs a credit score of at least 680 points to avail a conforming mortgage. A down payment of 25 percent of the purchase price of the home has also become mandatory. Without the requisite down payment, one will be required to purchase private mortgage insurance. Piggyback lending and seller financing have become a thing of the past. The minimum credit score to buy a home by availing an FHA (Federal Housing Administration) insured mortgage is around 620. A favorable employment history and a credit score of about 620 may be sufficient for one to qualify for an FHA insured loan with mortgage payments constituting approximately 30% of the borrower's gross income.

In fact, as far as FHA insured loans are concerned, the borrower's credit history is more important than credit scores. This does not mean that people with a bankruptcy or a foreclosure on their record cannot avail a mortgage. It just means that they would have to contend with a waiting period of three years, after completion of a foreclosure sale and the bankruptcy should be at least two years old. One must bear in mind that the minimum credit score to buy a house does not guarantee the borrower of receiving the best rate of interest on the loan. Thus, instead of focusing on just the credit score needed to buy a house, one should try and improve credit scores as well as the credit history.