What FICO Score is Needed to Buy a House Today?

Reader Question: "I want to buy a house next year, and was wondering what FICO score is needed to get a loan. Is there a certain number I need to have, or does it just depend on the situation and the lender?"

These are all good questions, and I promise to answer them as best I can. But first, I want to provide some basic definitions for people who are unfamiliar with this subject. Let's talk about what a FICO score is in the first place, and then we'll discuss what score is needed to get a mortgage loan these days.

The FICO Score Defined

FICO is an acronym for Fair Isaac Corporation. This is the company that developed the scoring model used by most mortgage lenders. There are actually many different types of scores and scoring systems, but the FICO credit score is the most common and widely used of all of them. The range goes from 300 to 850. Higher is better. So when you hear somebody talk about having "good credit," they are talking about a high number.

Lenders and creditors will use your FICO score to determine your "creditworthiness" -- or in other words, the level of risk posed by lending you money. And that's brings us up to the question you asked.

What Score is Needed to get a Mortgage?

When it comes to buying a home and getting a mortgage loan, there are two "cutoff" points for your FICO score "cutoff" points. The exact number will vary from one lender to the next. But before we talk numbers, you need to understand what these two levels are.

1. You will need a certain FICO score just to get approved for a home loan. In other words, you need to meet a certain criteria just to get your foot in the door. This minimum cutoff point will vary from one mortgage company to the next, but it's safe to say that a FICO score of 650 or above will open a lot of doors for you.
2. If you want to qualify for the best interest rates on a home loan, you will need an even higher number. Once again, this varies based on many factors. In the current economy, I would say that a FICO credit score of 760 or above is needed to get the lowest / best rates a lender has to offer.

Keep in mind there are other factors that will determine whether or not you get approved, and what kind of interest rate you get. The size of your down payment also plays a role, as does the size of the loan.

You asked what FICO score is needed to buy a house these days. I've provided some general ranges for you above, but these numbers are certainly not set in stone. These are just the scores most often cited by lenders. If you really want to know if you can get a mortgage, the best thing to do is apply for one. That's the only way you'll know for certain.

Where to Learn More

Here are some related articles on this subject. This might give you a more well-rounded view of the credit industry in general, and the types of qualifications you need to get a home loan these days. If you plan to buy a house in the near future, these articles are worth a read:

• Credit Score Needed to Buy a House in 2009
• Minimum Score is Needed to Get a Mortgage Loan

I hope this answers your question about FICO ranges and home loans, and I wish you all the best in your home-buying process. If you have additional questions on this topic, try using the search box at the top of this website. There are hundreds of articles and Q&A sessions on this blog, and you can find even more on our main website.

Disclaimer: This website provides general information for a wide audience. We do not provide specific financial advice, nor should you treat it as such. This article explains the basic FICO score that might be needed to qualify for a loan and buy a house in today's economy. It provides general score ranges only. These numbers are not set in stone, and they vary from one mortgage lender to another.

What Kind of Credit Report Information is in My File?

Reader Question: "I plan to get a copy of my credit report soon, so I can find out if I'm qualified for a mortgage loan. I was wondering what kinds of credit report information I can find in my file. Does it show my score, or just a bunch of historical data."

There are a couple of things we need to talk about, based on your question. I want to make sure you understand how all of this stuff ties together. In order to do that, we need to talk about credit reports, scores, and the mortgage approval process.

Your credit report information does not include your score. The score is based on the information found within the reports, but they are two different things. You actually have three different reports -- one produced by Experian, one that come from TransUnion, and one from Equifax.

To confuse matters further, these three companies do not share data. So the information found in one credit report might be different from the information in the other two. Redundant? Yes. Confusing? Yes. But that's just the reality of it.

Here's what it all boils down to. Your credit report information comes from your own financial activity. This data is later used to produce your credit scores (you have several of those as well). The image below shows how all of these things are connected.

Finding False Information in Your Reports

In a perfect world, your credit report information would be 100% accurate at all times. There would never be any errors, omissions or inaccuracies. But we do not live in such a world, and mistakes are common within the credit reporting industry. That's why you should get a copy of your reports once a year to check them for accuracy. This is especially important if you plan to apply for a mortgage loan in the near future. The last thing you want is to have your application rejected because of false information in your credit reports.

This is why I recommend checking your credit history at least a year before you plan to buy a home, if at all possible. It gives you time to make any corrections that are necessary. Here's what you should do to correct such errors.

So, what kind of credit report information do these companies maintain? Here's a short list of items that might appear in your file:

• Personal information about you. This includes your name, Social Security Number, current address, etc.
• Information about your credit history. This includes any cards you have used over the years, current balances, any missed payments, etc.
• Public records. This includes any legal judgments that have been made against you (of a financial nature), such as bankruptcy, tax liens, etc.
• Inquiries. Whenever somebody "runs your credit," it will show up on your report.

This is by no means the only information in your credit reports -- just the most important stuff. If you want to learn more about these key sections of your report, check out this article.

Questions About Credit Reports

If you have any questions about personal credit, as it applies to mortgages and home buying, feel free to send it to us. You might also want to review the big library of articles and Q&A sessions on our main website.

Remember, your credit report information is a byproduct of your own actions. If you establish good financial habits for yourself, and you use your credit sparingly and responsibly, then you will have positive information in your reports. This will help you achieve a good FICO score, which in turn will help you secure a low interest rate on your mortgage loan. But it all starts with you.

Must read: The Truth About Credit Reports

Can a Secured Credit Card Improve My Credit Score Rating?

Reader question: "I am trying to improve my credit score rating so that I can buy a house early next year. I don't currently have any cards because of my past history, but somebody told me I could use a secured credit card to improve my score. Is this true? And if so, how should I use the secured card in order to improve my rating?"

I don't advocate using credit cards just for scoring purposes. But if you need one for other reasons, it's certainly nice to know it can improve your credit score (sort of a bonus). Of course, you have to use it the right way for this to happen.

So yes, using a secured card can certainly improve your credit score rating over time. In fact, using any form of credit can improve your score -- if you do it responsibly. I'll get into what "responsible" means in just a moment, but first I would like to explain what a secured credit card is. Some readers may not be familiar with this term, so let's define it.

The Secured Credit Card - Explained

Basically, these are cards that are secured by a cash deposit that is paid up front. As you're probably already aware, a regular credit card does not require you to put down any kind of deposit. You simply apply for the card, and if you have a decent credit history you'll probably get approved. In fact, half the time you get pre-approved in advance, which is why we get so much advertising mail to that effect.

But a secured credit card is different. In order to get one of these cards, you must put down some kind of deposit up front. On average, the deposit will range from $500 - $1,000. After making that initial payment, you would have a credit line open, and you would be able to charge a certain percentage of the deposited amount.

Here's a good example:
Get a Classic Black Secured Visa Now


At this point, you might be asking why somebody would do this. After all, it seems like you are just reducing the amount of money you have at your disposal. If you put down a certain amount of money in advance to get a secured credit card, and they only allow you to charge a certain percentage of that deposited amount, you're essentially giving money away. Right? Well, this brings us up to the question you've asked.

People who use these cards do so because they cannot qualify for a regular credit card, usually because they have some kind of financial catastrophe in their recent past. For example, someone who has just declared bankruptcy will probably be turned down for a credit card application.

This puts the person between a rock and a hard place. On one hand, people know that using a credit card wisely can help improve a credit score rating. But you can't even get a card when you've just filed bankruptcy (or suffered some other financial calamity). It's almost as if you're stuck. So what do you do?

This is the kind of scenario where a lot of people use secured credit cards to improve their credit score rating -- because it's the only type of card they can get in their current financial situation. They simply have no other choice, other than paying cash for everything (which is not a bad idea actually).

As with everything else in the financial industry, there are certain warnings you should keep in mind. If you have decided to use a secured credit card to try and improve your credit score, you need to do thorough research into the company you are using. In other words, you need to look before you leap.

A lot of companies make offers that sound too good to be true, and in most cases they are. They make bold claims about how you'll be able to achieve an excellent credit rating by using their secure cards, but nobody can promise such a thing. Yes, this is a viable strategy for boosting your credit score, but you need to use common sense and research to protect yourself.

How to Improve Your Credit Score by Using One

Here are the steps I would recommend if you're going to use a secured credit card to improve your credit score rating.

1. Choose a secured card from a reputable company.

It's amazing what you can learn about a bank or financial company just by using the Internet. And that's exactly what you should do before you apply for a secured credit card from such a company.

First, go to the Better Business Bureau website and do a search for the company's name do they have a lot of complaints filed against them? The order they have a pretty clean customer service record?

Next, you should do a general Internet search for the company's name using Google or some other major search engine. You can also search the FTC website to see if any complaints filed against that credit card company.

A reputable company worth considering:
Get a Classic Black Secured Visa Now


2. Find out about monthly fees and other charges.

Secured credit cards come in a wide variety of "shapes and sizes." Some of them can be a good value, while others simply take advantage of consumers by charging outrageous fees. It's like everything else in the financial industry -- there are some good ones and some bad ones, and lots of things in between.

With a bit of homework, however, you can find companies who offer secured credit cards without all of those fees. This is the kind of card you want to use to improve your credit score rating, because it won't add to your existing debt.

3. Use your card wisely and sparingly.

The best way to use a secured credit card to improve your score rating is to make small charges on a regular basis, and then to pay the balance down each month. The last thing you want to do is accumulate a huge balance on your card. This defeats the whole purpose. Remember, you're trying to use your secured credit card in such a way that improves your credit score rating, and this means you must maintain a low balance.

Within the financial industry, this is referred to as your "utilization ratio." If you're using a high percentage of your available credit limit, then you have a high utilization ratio. This can actually lower your credit score, which is the exact opposite of what you're trying to do. By making small purchases from time to time, and by paying your balance down each month, you'll have a much better chance of improving your credit score rating over time.

4. Pay all of your other bills on time.

Your payment history accounts for approximately 35% of your overall credit score. So it has the potential to make or break your score, depending on your own actions. In addition to paying your secured credit card balance on a timely basis, you must pay all of your other bills on time as well. This is the key to building -- or rebuilding -- a solid credit history.

5. Try to pay down your existing debts.

The amount of money you currently owe on your various debts has a direct influence on your credit score. If you are nearly maxed out on one or more credit cards, it's going to have a negative impact. So, at the same time you are using your secured credit card to improve your score rating, you should be making every effort to pay down your existing debts. Start with the debts that have the highest interest type them, such as any high-interest cards you've used in the past. This is a sound strategy for getting your finances under control in general, and also for improving your credit over time.

Those are the steps I recommend you take when using a secured credit card to improve your credit score. Remember, there are other ways to boost your score, so you need to keep the big picture in mind. A secured card can also be a sound strategy to achieve this goal, if it's done properly. Use the card sparingly and wisely, and practice good financial habits in general.

Will Closing a Credit Card Account Affect My Credit Score Negatively?

Reader Question: "I have recently paid off a couple of credit cards and I plan to close two of them. When closing a credit card account affect my credit score in a negative way? I don't mind leaving the accounts open if it's necessary to keep my score up."

It has always been my opinion that people should close their credit card accounts if and when they feel necessary -- regardless of how it affects your score. That is my personal feeling on this subject. You don't have to be an industry insider to recognize the cozy relationship between the card companies and the credit agencies. They would have us believe that you need credit cards to maintain a good score, because it serves their own interests. But that is simply not true.

Granted, using a credit card wisely is one of the easiest ways to establish and maintain a good credit score. But you should not feel compelled to keep any accounts open solely for credit scoring purposes. To put this all in perspective, we should take a look at the FICO credit-scoring chart below.



You can see that the length of your credit history accounts for roughly 15% of your overall score. In most cases, the length of your history dates back to the first account you opened -- whether that was a credit card, a car loan, or some other form of financing. So by that logic, closing your oldest credit card account could shorten the length of your history.

How this affects your score will depend on the other factors shown in the chart above. For example, if you pay all of your bills on time and maintain low balances on your credit cards (relative to the limits on those cards), then the effect of closing your accounts will be minimized.

Here is what you should take away from all of this:

The Result of Closing Credit Accounts

It's impossible to predict what will happen to your score when closing a card out. If you close your oldest account, it will affect you more than closing a newer account, and it could possibly lower your score as well. But you should not feel trapped into keeping the accounts open simply to avoid hiccups within the credit scoring model.

If you need to close those accounts for some valid reason, then go ahead and do it. If you need your score to stay where it is now (as much as possible, anyway), then you might want to hold off on closing those accounts for the time being.

You should also research the concept of "utilization ratio," which is a comparison between you available credit limits and the amount you are using. This ratio will also be affected by the closure of one or more accounts. You can learn more about it in the article below.

Does Canceling Credit Cards Improve Your Credit Score?

In the end, this is a decision that only you can make for yourself. All I can do is explain how closing an account may affect your credit score in the long run. It could certainly have an effect, but it's only one factor of several that go into the scoring models.

Credit Scores for Immigrants to the U.S. - How Does It Work?

Reader Question: "I am an immigrant to the United States, originally from England. I have had good credit in my previous country, and I'm wondering if this transfers to the United States in some way."

Your actual credit history will not transfer from your England to the United States. But if you bring your good financial habits with you, you should be able to establish a good credit score in the United States fairly quickly. Many immigrants have done this before you, so you can certainly follow in those footsteps.

It could take several months to establish a score, but it's a fairly straightforward process. I generally don't recommend using credit cards just for the sake of establishing a credit score. But if you do need to open a credit account, that's probably the fastest way to establish a credit history in the U.S. Most importantly, you should pay all of your bills on time and keep the balance on your credit card relatively low.

Two Credit Goals for Immigrants

There are two things an immigrant in your situation wants to do. Not only do you want to establish credit, but you also want to achieve a good credit score. Having a good score is the key to financing opportunities in this country -- not to mention the money you will save in the form of lower interest rates.

If you plan to open a credit card account after moving to the United States, my advice is to start with just one card. Use it sparingly, and maintain a low balance on the card. This will help you establish a pattern of good credit usage, which is the key to achieving a good score.

I hope this answers your question regarding your immigrant status, as it pertains to establishing a credit history here in the United States. There are several other Q&A sessions on this blog that pertain to the subject. For your convenience, I've included those articles below. Oh, and I almost forgot to say ... welcome to the U.S.!

Related article:
Not a U.S. Citizen - How to Get a Credit Score
How to Establish Credit for the First Time

Are Poor Credit Home Loans Still Available?

Reader Question: "I used to see a lot of websites offering poor credit home loans for folks like me. But when I do a search for this online today, all I can find are articles and advice. Are there any home loans for people with poor credit anymore? Is this one of the things that changed when the economy went bad?"

When a lender gives a mortgage to somebody with bad credit, it's referred to as a subprime mortgage loan. "Subprime" simply means the borrower's credit score is below the ideal or "prime" range the lender prefers. So they lump those people into a separate category, with different qualification criteria and different interest rates.

That's the vocabulary side of things. Now let's talk briefly about the history side of things. In the late 90's and early 2000's, subprime lending was a booming business. Lenders were giving home loans to people with poor credit in record numbers, and they were making billions of dollars by charging higher interest rates.

You know the rest. Millions of these people ended up in foreclosure, but they had purchased homes they couldn't really afford. So we had a subprime crisis. Then we had a housing crisis. And, eventually, our economy went into recession.

So what does all of this mean for people with credit problems? It means that those poor credit (subprime) home loans are much harder to come by today. In fact, they've practically become extinct. They will probably make a comeback at some point, because the rampant greed of Americans always wins out over common sense. But that comeback is probably several years away -- or so I hope.

How to Fix a Poor Credit Situation

Here is the bottom line. People with poor credit should focus on improving their scores before pursuing a mortgage loan to buy a house. This will open more doors for you, and it will also help you secure a lower interest rate on the loan. Remember, even if you do get approved for a home loan with poor credit, you are going to pay an extremely high interest rate (when compared to a borrower with a good score).

If you need help improving your credit score before buying a house, you'll find plenty of advice to help you on this website. We have dozens of articles on the subject of how to raise your score, and plenty of home loan advice too.

If you have additional questions about the connection between credit and mortgages, you might want to try using the search tool at the top of this page. There are more than 250 Q&A sessions on this blog (at the time of this publication), so you're bound to find some helpful information that relates to your situation.

Disclaimer: This article about poor credit home loans is for educational purposes only. We are not acting as financial advisors. You should not make any financial decisions based solely on the information provided herein.

Credit Score of 545 - What are My Mortgage Options?

Reader Question: "I want to buy a home buy I have a 545 credit score right now. I was told by a friend who knows a lot about this stuff that my score is too low to get a mortgage loan. Is he right. If so, what can I do to improve my score of 545 to the range needed to buy a home?"

I make a point not to answer questions related to mortgage approval, because only a lender can answer those questions for you. With that being said, I can say that you will probably have a hard time getting approved for a mortgage loan with a credit score in the 545 range. But that certainly doesn't mean you are powerless in this department. On the contrary, there is plenty you can do to improve your score to the range needed for a mortgage loan.

You may also want to look into FHA home loans, because you can generally get approved for one of these loans with a lower score (as compared to a non-FHA traditional mortgage loan). But in my personal experience, based on what I've heard from other mortgage shoppers and lenders, a 545 credit score may be too low even for an FHA loan.

Those are two important points I want to get across. FHA loans are easier to qualify for, and there is plenty you can do to improve your credit score. Here's a third point to keep in mind. Every lender has its own criteria and underwriting guidelines. What this means is that one mortgage company might approve a person that another lender rejects. In other words, one size does not fit all.

Lastly, you need to consider the interest rate on the loan. The lender will give you a rate partly based on your credit score and other qualifying factors. So a lower score generally means you will pay a higher interest rate, which increases the size of your monthly payment as well. You already need to improve your 545 credit score just to get approved for a loan. But you also want to improve it as much as possible because you'll save money by getting a lower rate. So you have two motivating factors at work here.

How to Improve a Score of 545

This leads to the next logical question, which is: How do I raise my score as quickly as possible? There is plenty of advice on this blog to help you with that, and I recommend starting with the articles listed below.

• How to Raise Your Score Fast in 2009
• Score Needed to Buy a Home in 2009

I hope this article helps you improve your 545 to a 650 or better. If you can get it above 700, you'll be even better positioned to get a good rate. Remember, getting approved for a mortgage is only one of your goals. You also want to get a decent interest rate to make the loan more affordable for you. So work on that 545 credit score ... you can do it!