What credit score do you need to buy a house? It’s a simple question, but the answer is that it depends. If you plan to pay for the house with cash, your credit score no longer matters. Yet most of us don’t fall into the “pay cash” category. We require a home loan to complete the transaction, and that’s where credit scores come into play.
Americans spend around 35 percent of their income on housing each month. Current median home values in the US are hovering around $344,150. If you can’t come up with a cash payment, it requires a home loan from a financial institution. Before they give you the funding, they need assurance that you’ll pay it back.
The more money you request, the more risk the lender takes on. In other words, a full cash offer is zero risk to the lender. A no-down-payment home loan is the opposite; it’s the highest risk for the lender.
And that’s where the lender starts looking for clues on how likely you are to pay back the loan, starting with your credit score. Let’s take a look at the credit score requirements for a no-down-payment home loan.
Why Your Credit Score Matters to Lenders
Your credit score is used by the lender as an indicator of your ability to pay back the loan. It’s also used to establish the loan conditions: typically, the higher your score, the lower the interest rate.
When you first apply for a home loan, the lender dives in to learn more about you. You fill out an application, provide a few pieces of financial information, and let the lender assess the situation. Over the years, lenders have learned how to assess risk, and a credit score can be a valuable indicator of how financially trustworthy you are. Thankfully, sending multiple mortgage applications won’t decrease your credit score significantly long term.
What Is Considered a Good Credit Score?
Every lender uses its own criteria to assess risk. Still, most use the FICO model for credit scores as a starting point. It grades consumers on a scale of 300 to 850 points. The higher the score, the less risk to the lender.
- 800 or higher is considered exceptional
- 740–799 is considered very good
- 670–739 is considered good
- 580–669 is considered fair
- 579 or lower is considered poor
Why Credit Scores Matter to No-Down-Payment Home Loans
As the name suggests, a no-down-payment home loan requires no money for a down payment at the time of closing.
A down payment is the amount of money you bring to the closing as a part of the transaction. It’s a good faith first payment to show your commitment to repaying the loan. For example, if you buy a home for $300,000 and have a 20 percent down payment, you will bring $60,000 to the closing table. Lenders often require a down payment because they’ve determined you’re less likely to walk away from a loan if you have a financial investment in the property. A down payment is that investment.
Yet, coming up with that much money up front can be difficult for some homebuyers. First-time homebuyers, buyers going through transitions because of divorce or death, or even current homeowners looking to buy a new or second home benefit from a no-down-payment home loan.
The only way to get a home loan with no down payment is to find a lender that offers zero-down loans. Solarity Credit Union, for example, has two zero-down home loan options:
- Home Now is a zero-down home mortgage ideal for well-qualified home buyers, with waived lender fees and reduced private mortgage insurance.
- USDA home loans are offered with reduced rates and closing costs rolled into the home loan. These come with some income restrictions to qualify and are only available in specific locations.
Can You Qualify with a Low Credit Score?
Where do you fall on the credit score scale? When you see yourself in a lower range, it’s easy to get discouraged and assume you’ll never qualify for a home loan.
But it is possible to get a home loan with a low credit score. You’ll pay higher interest rates and have higher monthly payments. Lenders take on higher risks with borrowers who don’t meet their qualifications so they pass that risk on to the borrower.
How to Improve Your Credit Score Before You Apply for a Loan
If you’re in the beginning stages of buying a home, it’s wise to evaluate your creditworthiness before applying for a loan. If your score isn’t great, you have options.
Check Your Credit Rating and Correct Any Errors
Check your credit score by pulling a report from each of the three major credit agencies: Experian, Equifax, and TransUnion. All three offer a free annual report to help you evaluate your rating.
Look through each of them carefully and take note of anything inaccurate or missing. All three agencies have ways of correcting or disputing the information. File the appropriate documentation and check back to ensure it is reported or corrected.
Pay Down Credit Card Balances
A credit utilization ratio is determined by the amount of debt you have in relation to the amount of credit available. To calculate this, divide the amount of debt by the amount of credit. For example, if you have $5,000 in debt and $10,000 in credit, your credit utilization ratio is 50 percent. Lenders like a credit utilization ratio of under 30 percent.
Pay Bills on Time
Not only do credit agencies consider your debt ratio, but they also consider how well you manage your finances. They’ll evaluate how well you’ve made payments on your debt over the past seven years. Late payments will decrease your credit score.
Manage Your Credit Carefully
While closing unused accounts may seem like a good idea, it can actually cause your credit score to drop. The credit utilization ratio is based on the amount of debt you carry in relation to the amount of credit available. Keeping unused accounts open will help you lower this ratio to an acceptable level.
However, that doesn’t mean you should go out and open new accounts. Opening an account requires the credit card company to check your credit rating, which can lower your credit score slightly. Think longevity — sudden changes bring about questions. Stability is key.
Are You in the Market for a No-Down-Payment Home Loan?
There isn’t a specific credit score needed to qualify for a no-down-payment home loan. As a general rule, the higher your credit rating, the easier it will be to qualify for a loan. No matter your current situation, there are ways to move forward with your dream. With a bit of time and careful planning, you’ll soon have a house you can call your own.
