What Credit Score Is Needed for a House? A Comprehensive Guide

Buying a home is a significant milestone, but if you’re planning to finance it through a mortgage, one of the most crucial factors lenders will look at is your credit score. Your credit score not only influences whether you qualify for a mortgage, but also impacts the interest rate you’ll receive, potentially saving or costing you thousands of dollars over the life of your loan. In this comprehensive guide, we’ll explore the credit score requirements for homeownership, break down how scores affect mortgage options, and provide practical tips to improve your score if necessary.

Why Your Credit Score Matters When Buying a House

Your credit score is a three-digit number that reflects your financial reliability, based on factors like payment history, credit utilization, and account history. Lenders rely on this score to determine your risk level as a borrower. A higher credit score suggests that you’re more likely to repay the loan, making you a lower-risk applicant. This can lead to better mortgage terms and lower interest rates, while a lower score might limit your options or result in higher rates.

Understanding the credit score required for different types of mortgages, and what affects those requirements, can help you approach the home-buying process with confidence.

What Credit Score Is Generally Needed to Buy a House?

In Canada and the U.S., the minimum credit score needed for a conventional mortgage typically falls between 620 and 680. However, this minimum can vary depending on the type of mortgage you’re applying for, the lender’s specific requirements, and other financial factors like your income, debt-to-income ratio, and down payment size.

Here’s a breakdown of how different credit score ranges can impact mortgage options and the likelihood of approval:

Excellent Credit (760-900): With an excellent credit score, you’ll have access to the best mortgage rates and terms, and lenders will view you as a very low-risk borrower. This range qualifies you for the lowest interest rates, which can save you a considerable amount over the term of your mortgage.
Good Credit (700-759): This range still qualifies you for favorable rates and mortgage terms. While you may not receive the absolute lowest rate, lenders will generally offer competitive rates and conditions.
Fair Credit (660-699): With a fair credit score, you’ll still qualify for a mortgage, but your interest rates will likely be higher than for those with excellent or good scores. Lenders may consider you a moderate risk, which can result in more limited loan options.
Poor Credit (580-659): In this range, getting a conventional mortgage becomes challenging. Some lenders may approve a mortgage, but interest rates and terms will be less favorable. Alternatively, buyers in this range may need to consider a government-backed mortgage or work on improving their credit before applying.
Very Poor Credit (300-579): With a score in this range, securing a mortgage will be extremely difficult, as lenders view applicants with very poor credit as high risk. Improving your score is likely necessary before pursuing homeownership.

While these ranges provide general guidance, mortgage lenders also evaluate other financial factors to determine eligibility and offer terms.

Different Types of Mortgages and Their Credit Score Requirements

The type of mortgage you’re seeking can also impact the credit score requirements. Different mortgage types serve different purposes and are aimed at diverse borrower profiles.

Conventional Mortgages

Conventional mortgages are the most common type of home loan, and they typically require a minimum credit score of 620 to 680. With a conventional mortgage, lenders set credit score requirements based on their own standards, meaning some lenders may accept a score as low as 620, while others may prefer a score above 700 for more favorable terms.

Because conventional loans don’t have government backing, lenders tend to impose stricter criteria. However, they are generally accessible for borrowers with a stable credit history and moderate to high scores.

FHA Loans (United States)

While not available in Canada, FHA loans in the U.S. are relevant for American readers. These loans are insured by the Federal Housing Administration and are designed to help first-time and low-credit buyers secure mortgages. FHA loans typically require a credit score of 580 or higher, and in some cases, scores as low as 500 may be considered with a larger down payment.

CMHC-Backed Mortgages (Canada)

In Canada, mortgages backed by the Canada Mortgage and Housing Corporation (CMHC) help those with limited down payments or lower credit scores. CMHC-backed mortgages are available to those with a minimum credit score of around 600. This type of mortgage allows for a down payment as low as 5%, making it accessible to first-time homebuyers or those with limited cash reserves.

Private Lenders

Private lenders typically have more flexible criteria, often approving mortgages for borrowers with lower credit scores than traditional banks or credit unions. Private lenders, however, tend to charge higher interest rates to offset the risk associated with lower credit scores, and these mortgages may include additional fees. For those with credit scores below 620, private lenders may provide a pathway to homeownership, though at a higher cost.

Alternative and Subprime Mortgages

Subprime mortgages are designed specifically for individuals with credit scores below 600. These loans come with higher interest rates and fees to compensate for the increased risk. Subprime lenders may offer more flexible terms and approve applications based on other factors, such as income stability or a larger down payment, making them an option for those who need to buy a home urgently but have credit challenges.

Factors That Affect Your Credit Score for a Mortgage

Your credit score is based on several factors, and understanding each one can help you make improvements before applying for a mortgage. Here’s a breakdown of the main factors:

Payment History (35%)

Your payment history has the biggest impact on your credit score. Consistently paying bills on time builds a positive history, while late or missed payments can lower your score significantly. Before applying for a mortgage, make sure to maintain a clean payment history.

Credit Utilization Ratio (30%)

Credit utilization is the percentage of your available credit that you’re using. A low credit utilization ratio (ideally below 30%) is viewed favorably by lenders. For example, if you have a $10,000 credit limit and a balance of $2,500, your utilization ratio is 25%, which would positively impact your score.

Length of Credit History (15%)

The length of time you’ve had credit accounts open also plays a role in your score. A longer credit history with accounts in good standing shows lenders that you have experience managing credit responsibly. Keeping older accounts open can help maintain this portion of your score.

Types of Credit in Use (10%)

A mix of credit types—such as credit cards, installment loans, and a car loan—demonstrates that you can manage different financial obligations. Although it has a smaller impact, a healthy mix can be beneficial, especially when lenders evaluate your overall credit profile.

New Credit Inquiries (10%)

Applying for new credit results in a hard inquiry on your credit report, which can lower your score slightly. While one or two inquiries may not impact your score much, multiple inquiries within a short time frame can signal financial instability to lenders.

Tips to Improve Your Credit Score Before Applying for a Mortgage

If your credit score isn’t where you’d like it to be, there are several effective strategies to improve it before applying for a mortgage. Here are some tips:

Pay Down Outstanding Debt

High balances on credit cards or lines of credit can increase your credit utilization, which negatively affects your score. Paying down your balances and keeping your utilization below 30% of your total credit limit can give your score a boost.

Make All Payments on Time

A history of on-time payments is essential to building a positive credit profile. Set up automatic payments or reminders to ensure you don’t miss any due dates, as even one missed payment can lower your score.

Check Your Credit Report for Errors

Review your credit report from both Equifax and TransUnion (Canada’s major credit bureaus) for any errors. Mistakes, such as incorrect balances or missed payments, can harm your score unnecessarily. Dispute any errors with the bureau to have them corrected.

Limit New Credit Applications

Avoid opening new credit accounts or making multiple applications leading up to a mortgage application. Each hard inquiry can lower your score slightly, so it’s best to wait until after your mortgage is approved to apply for additional credit.

Keep Old Accounts Open

Even if you’re not actively using some of your credit cards, keep older accounts open to maintain the length of your credit history. Closing old accounts reduces your overall credit history length and can impact your score negatively.

Common Myths About Credit Scores and Mortgages

There’s a lot of misinformation around credit scores and mortgages. Here are some common myths clarified:

Myth 1: Checking your own credit score lowers it. Checking your own score is a soft inquiry and does not affect your credit. Only hard inquiries from lenders impact your score.
Myth 2: You need a perfect credit score to get a mortgage. While a high score helps, it’s not necessary to have a perfect 900. Many borrowers secure mortgages with scores in the fair to good range.
Myth 3: Carrying a balance improves your score. It’s a common misconception that carrying a balance boosts your score. Paying off your balance in full each month is better for your credit.

Preparing Your Credit Score for Homeownership

Knowing the credit score needed to buy a house is essential for a smooth mortgage process. While a minimum score of 620 to 680 is often sufficient, aiming for a higher score can open doors to more mortgage options and favorable rates. By understanding how your credit score impacts your mortgage, taking proactive steps to improve it, and debunking common myths, you’ll be well-prepared to approach homeownership confidently. A strong credit score is more than just a number; it’s a foundation that helps you secure the home you’ve been working toward.