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Bottom Line Up Front

  • Mortgage lenders consider multiple factors when offering a loan, and your credit score isn’t always the most important thing.
  • Your age of credit history and payment history confirm your ability to manage and pay off debt on time, which is a good sign to lenders.
  • Your debt-to-income ratio is one of the most important factors in getting approved for a home loan.

Time to Read

4 minutes

August 2, 2022

Have you ever wondered what credit score you need to buy a house? Even if you’re not super confident in your credit, you still might wonder if your credit score is high enough to qualify for a mortgage. Credit scores are important, but you could be eligible for a mortgage even with less-than-stellar credit. Think of your credit score like the score in a football game. It gives a good idea of your performance, but you need to watch the game (i.e., check your credit report) to get the full story.

Here’s what lenders are looking for in your credit history and what you can do to improve your credit score to buy a house.

Credit Scores Remain a Top Factor

It may not be the determining factor, but one of the top concerns among lenders is a low credit score. FICO scores range from 300 to 850. If you’re interested in the best interest rate possible, you’ll want your credit score to be around 740 or higher.

The good news is that these numbers aren’t set in stone. In recent years, lenders have become less strict about credit scores. On the flip side, this fluctuation means that credit score requirements can become stricter if there’s an economic downturn.

Payment History Can Make or Break a Loan

On-time payments on your credit cards, loans and bills are your way of communicating to lenders that you’ll pay for your loan on time, as well. Missing just one payment can lower your credit score and missing several could significantly reduce your chance at securing a loan. Defaulting on a loan, declaring bankruptcy or foreclosing a previous home will require years of rebuilding your financial reputation before you’ll be considered for a large loan.

Age of Credit History Matters

Another common concern for lenders is multiple recent applications for credit. For instance, if you’re trying to go from having one credit card to several within a short period of time, it might raise a red flag that you can’t afford your monthly obligations.

The length your accounts have been open is also important when asking for loans. This goes back to payment history—lenders want to see evidence that you’re capable of paying off multiple credit cards and other loans on time over the years.

Keep Your Debt-to-Income Ratio Low

Your debt-to-income ratio consists of 2 numbers comparing your debt and expenses to your income. The first number is known as your front-end ratio. This is your expected housing expenses divided by your gross monthly income. Then, the result is multiplied by 100.

Your back-end ratio comes next. It’s calculated by adding your monthly debt expenses to your housing expenses and dividing this amount by your monthly gross income. That result is also multiplied by 100!

These 2 numbers are the lender’s way of judging your ability to manage payments. The lower your ratio of debt to income, the more likely you’ll be to receive a loan. For your best shot at an affordable loan, lenders say your front-end ratio should be 28% or lower and your back-end ratio should be 36% or lower.

Improve Your Credit History

Aspiring home buyers need to pay attention to not just their credit score, but their entire credit report when shopping for a mortgage. If your credit score’s low and you have a less-than-ideal payment history, take time to improve these conditions before applying for a loan.

Next Steps Next Steps

  1. Request your annual credit report to review your credit score, account history and payment history. Look for any potential problems, such as a low score or pattern of missed or late payments.
  2. Pay your loans on time. A single missed payment can harm your credit score and create concern with lenders.
  3. If you’re about to apply for a loan, avoid applying for other forms of credit. Recent credit applications can raise red flags with lenders.

Disclosures

This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.