How credit scores affect mortgage options
Buying a house is one of the biggest financial decisions most people make—and your credit score plays a crucial role in the process. Whether you’re a first-time homebuyer in Delaware or looking to upgrade, understanding how your credit score affects your mortgage options can help you better prepare for homeownership.
What is a credit score?
Your credit score is a three-digit number that represents your creditworthiness. Lenders use it to determine how risky it might be to lend you money. The most commonly used scoring model is the FICO score, which ranges from 300 to 850. The higher your score, the better your chances of getting approved for a mortgage—and at a favorable interest rate.
Minimum credit score requirements by loan type
Different types of home loans have different credit score requirements. Here’s a breakdown:
1. Conventional Loans
- Minimum credit score: 620
- These are the most common types of home loans, not insured by the government. While 620 is the minimum, most lenders prefer scores of 680 or higher for better rates and terms on a conventional loan.
2. FHA Loans (Federal Housing Administration)
- Minimum credit score: 500–580
- FHA loans are more lenient on credit scores. If your score is between 500 and 579, you’ll need a 10% down payment. If your score is 580 or above, you may qualify with just 3.5% down.
3. VA Loans (Veterans Affairs)
- Minimum credit score: Usually 620
- Available to eligible veterans and active-duty service members. VA loans don’t require a down payment or private mortgage insurance (PMI), but lenders typically look for scores of 620 or higher.
4. USDA Loans (U.S. Department of Agriculture)
- Minimum credit score: 640
- For low- to moderate-income buyers in rural areas. While a USDA loan doesn’t have a set minimum score, most lenders require at least 640.
Why your credit score matters
A better credit score not only increases your chances of getting approved for a mortgage but can also:
- Lower your interest rate
- Reduce your monthly mortgage payments
- Improve your chances of loan approval with a smaller down payment
How to improve your credit score before buying
If your credit score isn’t quite where you want it to be, here are a few steps to boost it:
- Pay your bills on time: Payment history makes up 35% of your FICO score.
- Reduce your credit utilization: Aim to use less than 30% of your available credit.
- Avoid opening new credit lines: Each inquiry can lower your score temporarily.
- Dispute any errors on your credit report: You’re entitled to a free report each year from the three major credit bureaus (Equifax, Experian, and TransUnion).
Final thoughts
While it’s possible to buy a house with a credit score as low as 500, you’ll unlock better loan terms and lower monthly payments with a score of 700 or higher. Take the time to understand where your credit stands and what you can do to improve it before you start house hunting in the Delaware area. If you think you are ready to take the next step in your homebuying journey, fill out a pre-approval or contact one of our knowledgeable loan officers today!
This article is for informational purposes only. Loan Programs may have additional restrictions or requirements.
