Do You Need A Credit Score To Buy A House In The U.S.?
The American financial system runs on credit, and that includes the mortgage industry. You don’t need credit to buy a house in cash, but with the average new home costing $389,400, that’s not possible for most of us.
We’ll explain the credit score you need to buy a house, how you can buy a house with no credit, and ways to improve your credit score to buy a house.
Credit score needed to buy a house
Part of what determines the interest rate you’re offered when you borrow money to buy a home or for any other reason is your credit score. Generally, those with a credit score of 760 or higher will get the best, i.e., the lowest interest rate on borrowed money. Depending on the type of loan, the minimum credit score to qualify varies:
Conventional loans: 620
FHA loan: 580
VA loan: 580
USDA loan: 640
The average interest rate on a 30-year, fixed-rate mortgage is 5.057%.
Buying a house with no credit
It is possible to get a mortgage with no credit history. Keep in mind that having no credit is not the same as having bad credit. Those with little credit history have what is termed a “thin” credit file, meaning there isn’t enough information to compile a credit report and credit score. Having bad credit means your credit history shows a past of financial responsibility. Lenders are more forgiving of thin credit than bad credit.
If you have no credit, you’ll have to prove that you can afford the up-front costs and the monthly mortgage payments.
The federal government backs an FHA loan. If an applicant has no credit score, lenders can request a non-traditional merged credit report from a credit reporting company. Or the lender can compile a credit history themselves using alternative tradelines, including:
Utility payment records
Rental payments
Auto insurance payments
12 months’ worth of savings deposits
Most mortgage applications are processed through an automated system. Those with no credit history can request a manual underwriting, where a person reviews the application. For a conventional loan, the underwriter makes sure the borrower:
Has a cash downpayment
Has enough income to cover mortgage costs
Has a good debt-to-income ratio
Has a cash reserve
An underwriter will also look at the alternative tradelines we listed above.
If you know someone who has more credit history than you (and ideally a healthy credit score), you can apply for a mortgage with them. The co-borrower doesn’t have to be related to you, nor do the two of you have to live in the same home.
The lender will include the co-borrower on the loan and base their decision on whether or not to approve the mortgage on their credit history, score, and income. You and the co-borrower will each be equally responsible for the mortgage payments and will both be listed on the property title.
How to improve your credit score to buy a house
If you’re considering buying a home in the future, it’s never too early to start improving your credit score. In fact, you can boost your credit by as much as 100 points and faster than you might think! Here are some ways you can improve your credit score:
Reduce utilization to under 30% by paying off credit card balances or using a debt consolidation loan
Set up bill-paying reminders or auto payments so you never miss or make a late payment
Sign up for Experian Boost, a free service that reports payments not usually reported to the credit bureaus to boost the number of on-time payments on your credit report
Sign up for Upwardli’s Free Credit Action Plan
Check your credit report for errors and dispute any you find
