As a prospective homebuyer, your credit score can determine the most important aspects of a home purchase: your odds of loan approval, your interest rates and the amount you can borrow.
However, while you want your score to be as high as it can be, it also doesn’t have to be perfect. One useful fact to know before applying is the average credit score in your location to see how you rank compared to other borrowers in your area.
Read on to learn more about the kind score you need for a loan, the mortgage process, private lending and some tips to increase your credit score.
What is the minimum credit score requirement to buy a house?
There are two main credit scoring models: FICO (Fair Isaac Corporation) and VantageScore. Most financial institutions rely on FICO scores and use them as a way to gauge borrowers’ creditworthiness.
FICO scores are broken down into five categories:
- Very poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: 800 to 850
Many mortgage lenders require at least a 620 score for approval. However, those that offer loans backed by the Federal Housing Administration or the U.S. Department of Veterans Affairs might accept lower scores.
A score of 620 is considered “fair.” Compared to good or excellent credit scores, a fair score will likely mean a higher interest rate and a higher required down payment. If your credit score is below 620, it’s a good idea to work on repairing your credit before you start applying for a loan.
Average credit scores of homebuyers
In 2022, the average American had a credit score of 705, down from 717 in 2020. However, these numbers are nationwide and do not necessarily reflect the average in your area.
Here’s a breakdown of the states with the highest average credit scores:
- Minnesota: 739
- Wisconsin: 732
- South Dakota: 731
- Vermont: 731
- North Dakota & Washington (tie): 730
And those with the lowest:
- Mississippi: 675
- Louisiana: 684
- Alabama: 686
- Texas: 688
- Georgia/South Carolina (tie): 689
Different credit score types
FICO and VantageScore are two scoring systems used to evaluate your credit. They weigh the elements of your credit differently so the scores may differ.
FICO scores are calculated from five pieces of information:
- Payment history (reflects on-time and late payments): 35%
- Credit utilization (how much of your total credit limit you’re using): 30%
- Credit history (age of your oldest account): 15%
- Credit mix (different types of credit you have): 10%
- New accounts (number of accounts opened recently and new hard inquiries): 10%
The latest VantageScore (model 4.0), on the other hand, gives these categories different weights. Note that VantageScore uses slightly different terminology:
- Payment history (on-time versus late payments): 41%
- Depth of credit (age of your accounts): 20%
- Credit utilization (how much of your total credit limit you’re using): 20%
- Recent credit (number of accounts opened recently and new hard inquiries): 11%
- Balances (how much you owe overall on all your credit accounts): 6%
- Available credit (how much credit you have available): 2%
What do mortgage lenders consider when you apply for conventional loans?
Banks don’t just rely on your FICO score to determine approval. Lenders will conduct a comprehensive risk assessment that includes checking your payment history, how much of your available credit you’re using, and how much of your income is currently going towards paying existing debt.
Before contacting a mortgage lender, it’s important to get your paperwork together so you can speed up the evaluation process. This includes:
- Paystubs covering at least 30 days of earnings
- Your W-2 forms for the last two years
- Your signed federal tax returns for the last two years
- Documentation of any other sources of income
- Documentation of where your down payment is coming from
- Your two most recent bank statements
- Proof of your identity (typically a driver's license or state ID)
- Your social security number
- Any certificates of housing counseling or home buyer education you may have earned in this process
As we said above, some lenders will require at least a 620 credit score, but many will set a higher minimum credit score. Lenders and loan backers also generally ask for a down payment of up to 20%, but no less than 3%, of the total property value.
Here are some other factors a lender is likely to look at when considering you for a loan.
Available assets are anything you can use to prove you can afford the down payment and/or mortgage. This includes CD accounts, savings accounts, cash, cars, jewelry and anything else that you own outright and has significant value. To document and prove the value of your available assets, be sure to have receipts or proof of ownership.
Income and employment
Your employment and income are important because they show a continued ability to make the payments on your mortgage.
Lenders will ask for proof of employment and will also contact your employer to verify the information. The bank may also ask the Human Resources department to write a letter certifying details of your employment.
Required down payments
Most down payments range anywhere between 3% to 20% of the home purchase price. A higher down payment, whether it’s required or simply offered because you have enough funds to cover it, will translate into lower monthly payments and possibly lower interest rates.
Debt-to-income ratio (DTI)
DTI is an important measurement of your ability to pay back a loan and is meant to indicate how much of your actual income is going toward paying existing debt. It shows your existing debt as a percentage of your total income, which lets banks know how much income you have available to spend on your mortgage.
If you want to calculate your DTI before the bank does so, just follow these steps:
- Step one: Add up your monthly bills and commitments. Don't include other regular expenses like groceries, utilities and taxes. Examples of costs to consider include:
- Monthly rent or house payment
- Monthly alimony or child support payments
- Student, auto and other monthly loan payments
- Credit card minimum monthly payments
- Other debts or commitments
- Step two: Take your total monthly costs and divide them by your gross monthly income (your income before taxes). It should be a positive percentage.
The lower your DTI, the less risky you will look to lenders, and the better terms they will offer you.
You can use these numbers to help you determine how much house you can afford using the 28/36 Rule. This rule says your mortgage shouldn't cost more than 28% of your monthly pre-tax income, or 36% of your total debt from step one.
Best methods to increase your current credit score
Learning how to build credit or raise a low score might seem daunting at first. The fastest ways to improve your credit score include credit repair or counseling, repaying debts and paying off credit cards to increase your available credit.
Most lenders and credit card companies report your debt at the end of the pay cycle, which means you won’t necessarily see results immediately.
It’s important to remember that each of the three credit bureaus will most likely produce a different score and the financial information available to them at any given time. Also, your existing lenders aren’t all reporting at the same time each month, which means your credit report is always in flux.
Here are some things you can do right now to increase your credit score and improve the homebuying process.
Pay off your outstanding debts
A great way to see gains in your credit score is to pay off anything you can as quickly as possible, whether that be medical debt or something in collections.
To start, obtain your credit report. You can get a free credit report once a week. Many checking accounts now include credit monitoring, and for a pretty affordable fee per month, all three bureaus offer ongoing credit monitoring.
Once you have your credit report, take a careful look. If you find accounts you don’t recognize or any mistakes, be sure to dispute those with the particular reporting agency that issued the report. It will raise your score once the bureaus deliberate and confirm your claims.
Prioritize paying bills on time
One of the best ways to raise your credit score is by tracking your expenses and paying your bills on time.
Some bureaus offer the option of adding monthly bills or rent tracking to your credit report. This can be a way to add positive information to your report (provided those bills are paid on time). However, it’s important to note that only the most recent FICO scoring model takes this extra information into account, and most mortgage lenders still use older FICO models in their decision-making.
Don't open too many new credit accounts
When you apply for a credit card, there will be a “hard pull” on your credit report, which will temporarily hurt your score. Every time you apply for credit, make sure you weigh your likelihood of being approved against the effect it may have on your credit score.
It's also worth noting that credit accounts can open up opportunities for debt and missed payments, so be very clear with yourself about why you're opening the account, what you plan to use it for and how you'll manage it.
Additionally, try to vary the kinds of accounts you open. Revolving credit, like store accounts and credit cards, is one way to demonstrate your creditworthiness, but it's not the only option. A car, renovation or other major loan is also a good place to start. The credit bureaus like to see a healthy mix of accounts and account types to show that you can handle different types of debt.
Use a secured credit card
To improve your credit score, you may want to look into getting a secured credit card. These are cards that work like credit cards, but only after you’ve placed a deposit.
Usually, the credit limit for a secured credit card is equal to the deposit you’ve put down. This means the card company isn’t risking anything.
Summary of average credit score to buy a house
- There is no hard-and-fast minimum credit score to buy a house. Most mortgage lenders require at least a 620, which FICO rates as “fair.”
- The average American had a credit score of 705 in 2022, but experts say you should aim for at least 750.
- Some of the best methods to raise your credit score include paying off any outstanding debts and prioritizing paying bills on time.
- Most lenders will also need a down payment in the range of 3% to 20% of the total value of the house.
- When considering buying a house, calculate your debt-to-income ratio and how much house you can afford using the 28/36 rule, which states that your mortgage shouldn't cost more than 28% of your monthly pre-tax income or 36% of your total debt.
- Most importantly, be sure to carefully weigh both the market and your financial situation to help you decide whether now is the right time to buy.