Credit Score Needed to Buy a House

When it comes to buying a home, no definitive credit rating assures you of approval. A variety of factors determine whether you can purchase a home. But certain levels of credit scores can enhance your ability to earn loan approval, as well as ways you can augment a lower credit score to gain loan approval.

The Credit Rating

According to Lendingtree.com, most mortgage companies use your FICO score (or credit score) to determine your creditworthiness. The FICO score gets its name from the Fair Isaac Corp., which created the score that all three major credit reporting agencies use. When it comes to your FICO score, lenders look at a score of 720 as excellent, 620 to 650 as good and below 620 as subprime. Lendingtree.com says that final approval lies with the lender and that even an excellent credit score does not guarantee approval.

Influencing Your FICO Score

Some things go along with your creditworthiness and can influence whether you get approved for a home mortgage. Most of those items appear on your credit report and influence your FICO score. They can include your outstanding balances on credit cards and fixed-rate loans, late payments on credit cards and loans, balances you carry on your credit cards and outstanding debts and liens.

DTI

DTI is also called debt-to-income ratio. This is the amount of debt you have in relation to the income you make. It can have an impact on whether you're approved for a home loan. While it does not directly affect your FICO, it can be used in conjunction with a subprime, good or even excellent credit score to make approval harder. Most lenders look for a debt-to-income ratio of 35 percent or less before they approve a home mortgage loan.

A FICO Score's Impact on Interest

Even if you are approved for a home mortgage loan, your credit report can have an impact on the interest rate you pay. According to MyFICO.com, the better your FICO score, the better interest rate you'll get on the loan. For instance, MyFICO.com estimates that a person with a credit score of 760 to 850 will pay a rate of 5.26 percent interest on a loan of $200,000. A score of 660 or higher will likely keep you at less than 6 percent interest.

Overcoming Subprime Credit

Just because your FICO score isn't considered good, doesn't mean you won't be approved for a mortgage. According to the Home Buying Institute, you can overcome it. For instance, if you have a score between 680 and 699, you can get a rate that someone with a score of 740 or better would get if you're willing to pay a little of the principal on the loan up front.