Homebuyers

What is a Good Credit Score If You Hope to Buy a Home or Refinance Your Mortgage?

What if three little digits could save you tens of thousands of dollars? Your credit score isn’t just a number: it’s your financial superpower when it comes to buying a home.

A great credit score can lower your interest rate, shrink your monthly payments, and unlock various benefits.

“By scoring high, you will save money on several financial products at the same time,” said Geoff Knight, founder and CEO of FileTax.

Here’s what a good credit score is, how to boost yours, and what score you’ll need to buy a home or refinance your loan.

Ready to make those three digits work harder for you?

The benefits of having a good credit score

A high credit score comes with several helpful benefits. One of the most important is access to lower mortgage interest rates when buying a home.

A higher credit score makes you look like less of a risk to lenders. This may help you qualify for a lower interest rate than someone with a lesser credit score. This difference alone may save you hundreds, if not thousands, of dollars in interest over the course of the loan.

Knight also adds that a higher credit score can be useful in emergencies. It may help you obtain a low-interest credit line or a balance transfer.

While these may not be the benefits that first come to mind with a high credit score, they can still make a real difference in the case of a job loss, medical emergency, or unexpected home repair, such as a pipe or boiler breaking.

What is a “good” credit score?

A “good” credit score might be lower than you think. Homebuyers and those hoping to refinance their existing mortgages may not need a score over 800 to lock in a low interest rate.

In general, try to have a credit score with a ‘good’ rating. This is typically given to scores between 670 and 739. ‘Very good’ scores are 740 to 799, while scores above 800 are considered ‘exceptional.’

Lenders often offer the best deals for those with scores of 760 or above, said Knight. Lower scores may come with higher interest rates.

However, homebuyers may be able to qualify for a Federal Housing Administration (FHA) loan with scores between 500 and 580. Those seeking a Conventional loan typically need a higher credit score.

How to boost your credit score

One of the simplest ways to raise your credit score is to reduce the amount of debt you’re carrying.

You should try to reduce your debt to 30% of your credit limit, as paying down debt raises your all-important debt-to-income ratio. These types of changes can take 30 to 60 days to affect your credit score.

Make sure not to close any credit cards. These keep your available credit limit high, cushioning your score. Instead, keep a small recurring charge (like a streaming service subscription) that’s paid in full each month on no-longer-used cards.

You also don’t want to take on any new debt or open up new cards during this time.

Most importantly, make sure all bills are paid on time. Late payments can affect your credit score for a minimum of six months. Non-medical bills sent to collections can also stay on your record for years.

What’s the minimum credit score needed to buy a home or refinance a loan?

Different types of mortgages have different credit score requirements. But keep in mind these requirements are minimums. You typically won’t be getting great rates from a lender if your credit score is so-so.

While you may be able to qualify for an FHA loan with a credit score of 500, you will be required to make a 10% down payment. Credit scores upwards of 580 may allow you to put down just 3.5%.

U.S. Department of Agriculture (USDA) loans have a similar credit score requirement of around 580. However, this may vary by lender.

The credit score requirements to refinance an existing mortgage are similar to those for purchase loans. You will often need a score of at least 620 for a Conventional loan refinance.

Meanwhile, those seeking to refinance for a government loan, such as an FHA loan, generally need scores of between 580 and 620.