• Your credit score is an important factor in your ability to secure a home loan because it gives mortgage lenders insights into your financial habits concerning debt and repayment.
  • Higher credit scores correlate with higher mortgage approval rates and favorable interest rates.
  • You can improve your credit score by paying bills on time, strategically paying down your debts, and correcting any errors on your credit report.

Do you know what your current credit score is? And do you know your current score could help or hurt your chances of securing a mortgage loan?

Your credit score is not the only factor that determines whether or not you qualify for a home loan, but it is an important consideration. Lenders use your credit score as an indicator of the statistical likelihood that a borrower will repay their home loan as scheduled.

In this article, we will explain how credit scores affect mortgage applications, outline common credit score requirements, and provide strategies to improve your credit score before buying a home.

What Is a Credit Score?

A credit score is a three-digit number that indicates how responsibly an individual uses credit.[1]

There are different credit score models in use, but the most commonly used model is the FICO score. Your FICO score is based on the following factors:[2]

  1. Payment history: How debts have been repaid over time. Late payments, missed payments, foreclosure, bankruptcy, or defaults on previous loans can all lower your score. Consistent, on-time payments can improve it. Payment history accounts for 35% of your score.
  2. Amounts owed: How much debt you carry. One important factor under this umbrella is your credit utilization ratio, which is the debt balance as a percentage of the available credit. For example, if you have a credit card with a $10,000 limit and a $4,000 balance, the credit utilization ratio for that card is 40% (4,000 divided by 10,000). It is generally beneficial to maintain a credit utilization ratio below 30%.[3] Amounts owed accounts for 30% of your score.
  3. Length of credit history: How long your credit accounts have been established. Generally, it is more beneficial to have long-standing accounts. Length of credit history accounts for 15% of your score.
  4. New credit: Recently established loans and credit lines. Opening multiple new accounts over a short period can indicate higher risk, particularly for those without much credit history. Inquiries into your credit history for the purpose of opening a new account can also impact your credit score, so you should only apply for a loan or credit line when you're serious about opening that account. New credit accounts for 10% of your score.
  5. Credit mix: The types of accounts you have open, including credit cards, retail accounts, installment loans, and mortgage loans. This accounts for 10% of your score.

Interestingly, you don’t have just one FICO score. Each of the three credit bureaus (Experian, Equifax, and TransUnion) keeps its own records of your credit history and calculates your score independently. So your score may vary from one bureau to the next. However, unless there is an error on one of the reports, your scores from each bureau should be in the same general range.[1]

Why Does Your Credit Score Matter When Buying a House?

Mortgage lenders use credit scores as a factor when determining mortgage eligibility as well as interest rates and terms.

Earning a favorable interest rate is important for homebuyers because the interest rate affects the monthly payment and the total interest expense over the life of the loan. A lower rate means a lower cost of borrowing, which reduces your monthly payment and your overall interest expense.

In general, a higher credit score indicates that the borrower uses credit responsibly and represents a lower risk to the lender. Therefore, a higher credit score may increase the likelihood of being approved for a home loan with favorable rates and terms (depending on the borrower’s other qualification criteria).[4]

When buying a home, lenders consider your credit scores from all three credit bureaus. For a single borrower, lenders disregard the highest and lowest of the three and use the middle score. For two borrowers on the same mortgage application, lenders typically use the middle lower of the two borrowers' six scores.

Additional Qualification Criteria for Mortgage Loans

In addition to your credit score, mortgage lenders consider factors like the following when determining whether you qualify for a home loan and what interest rate and terms you can secure:

  • Stable income: Reliable income from sources like employment, business ownership, investment accounts, or retirement funds, typically for at least the last two years.
  • Your debt-to-income (DTI) ratio: The amount of your monthly debt payments as a percentage of your income. Generally, a lower DTI indicates less risk for the lender. Many lenders prefer to see DTIs of 36% of lower.
  • Your down payment amount: The amount of the purchase price you will pay upfront, out of pocket. A higher down payment typically indicates less risk for the lender. While a 20% down payment can reduce your borrowing costs, well-qualified buyers can put as little as 3% down with a conventional loan. Buyers who are eligible for specialty loans (like VA loans for veterans or USDA loans for rural buyers) may qualify for as little as 0% down.
  • Reserve funds and other assets: Cash you can access or assets you can convert to cash if needed. Higher reserves and assets generally indicate less risk for the lender.

What is a Good Credit Score to Buy a House?

The credit score required to buy a house varies by lender and mortgage loan type. For example, you may need a score of at least 620 to qualify for a conventional loan or at least 600 for an FHA loan.

However, lower interest rates may be reserved for borrowers with higher credit scores. So, if you have a score of 750 or higher, you may qualify for a better rate, which will save you money on interest expenses.[5]

Strategies to Improve Your Credit Score

Whether you need to increase your credit score to qualify for a home loan or simply want to increase your score to qualify for a better interest rate, there are several ways to improve your credit score.

Review Your Credit Report for Accuracy

Errors on credit reports are surprisingly common, with some studies finding that one in five Americans has inaccurate information listed on their credit reports.[6]

Americans are entitled to a free copy of their credit reports annually through online providers like AnnualCreditReport.com. You can access your credit report online and review it for accuracy. If you find any mistakes, you can file a dispute by contacting the credit bureau reporting the information.

Pay All Bills on Time Every Month

Your score may not improve overnight, but consistently paying your bills by their due dates can raise your score over time.

Reduce Your Utilization Ratio

If you have credit cards with high balances, paying them down can increase your credit score. Aim to get all credit card balances below 30% of their respective limits for a good credit utilization ratio.[3]

Think Twice Before Closing an Account

When you pay off a credit card, you might consider closing that account to avoid future spending and reduce identity theft risk. However, in many cases, closing an account may have a temporary negative impact on your credit score. This is because closing an account reduces your overall credit utilization ratio and your overall length of account history.[3]

Instead of closing the account, you might consider keeping it open but cutting up the cards to prevent future spending and monitoring your statements and credit reports for any fraudulent activity. You may even contact your current credit card companies to request a credit limit increase. This automatically reduces your existing credit utilization ratio by increasing the amount of credit available to you.

Avoid Opening New Lines

Opening a new line of credit temporarily decreases your credit score.[7] Furthermore, this can change your financial profile, potentially causing delays in closing on your new home. So, if you’re preparing your credit score for a home purchase, avoid opening new credit lines until your home loan is funded and you have confirmed that you are comfortable with your new mortgage payments.

Apply for Mortgage Loan Pre-Approval Today

A less-than-stellar credit score doesn’t necessarily prevent you from securing a home loan, but a lower score may require adjustments, such as a higher interest rate or down payment. Reviewing your credit score can help you understand your current situation so you can enter the mortgage loan application process with greater confidence.

It’s helpful to begin the mortgage approval process at the very beginning of your home-buying journey by getting pre-approved for a home loan. Pre-approval is when a lender informally reviews your finances to determine whether you qualify for a home loan and how much you can borrow.

The pre-approval can inform your budget, allowing you to shop in the right price range, and strengthens your eventual purchase offer by assuring the seller that you qualify for the funding needed to close the deal.

Learn more about the pre-approval process and start on the path to homeownership today!