Everyone talks about the value of good credit scores and if you need a high credit score to buy a home. However, few people know how high a credit score can go or the lowest credit score possible. One question often asked is: what is a good credit score to buy a house?
A 720 credit score is often cited as a good credit score for buying a home, but with what type of mortgage and down payment? This article will detail all of these questions and more.
720 Credit Score: Is It Good or Bad?
Fair Isaac Corp (NYSE: FICO) created the range of credit scores in 1989 and the system is used by all three major credit bureaus today. FICO Credit scores range from 300 to 850. A high credit score indicates a higher probability that loans will be paid back on time and in full.
Experian, one of the three bureaus, rates credit scores as follows:
- Poor credit: 300 to 579
- Fair credit: 580 to 669
- Good credit: 670 to 739
- Very good credit: 740 to 799
- Excellent credit: 800 to 850
Therefore, a 720 credit score falls within the “Good credit” range and is slightly above the average credit score of 715. A 750 credit score would be considered “Very good credit,” and a 650 would be considered “Fair credit.” The lowest credit score someone could have would be 300.
A 720 credit score should enable you to get lower interest rates on mortgages and other loans, connect utilities without leaving a deposit or procure a rental without much trouble. Remember that a 720 credit score falling from 750 or higher might indicate a recent missed payment or other credit problems. Therefore, a rising score is better than a falling score.
How Credit Scores Affect My Mortgage Rates
Lenders often look at factors other than the credit score. The 5 Cs of credit are:
- Credit history – a long-term list of your loans, credit cards and other payments made
- Capacity – income and employment history to indicate ability to repay a loan
- Collateral – the value of your home and any equity is assessed
- Capital – the savings, investments and other assets you have to help repay a loan
- Conditions – the purpose of a loan or other environmental and economic conditions
To qualify for a conventional mortgage, the minimum credit score required is only 620, but some lenders require 660 or higher and a 760 score or above will qualify you for the lowest interest rates. A 20% down payment is standard on a conventional mortgage, but if your score is above 720, that requirement may drop to 15%. Remember that a 20% down payment prevents the lender from requiring private mortgage insurance (PMI), saving you $30-$70 a month for every $100,000 borrowed. That adds up when median home prices are over $400,000 in 2024.
Conventional mortgages are subject to “risk-based pricing,” meaning your credit score is factored into your interest rate and any fees. Your rate and fees are based on the estimated risk of default that has historically been common among various credit scores.
What is a Good Credit Score for Buying a House?
There isn’t simply one good credit score for buying a house, because credit scores are used with other parameters, such as the amount of down payment, type of loan, income, assets and debt-to-income ratio (DTI).
For example, on an FHA (Federal Housing Administration) loan, the minimum credit score to qualify with a 3.5% down payment is 580, but if you put down at least 10%, a 500 credit score is sufficient to get a loan. However, any score below 580 will increase the interest rate substantially.
A credit score of 760 or higher will achieve the best interest rates and fees, but remember that your down payment amount also matters. Borrowers with more “skin in the game” (larger down payments) have a lower default rate than those with smaller down payments.
On a VA loan, there is no minimum credit score, but most lenders are looking for a 620 credit score or better. The advantages of a VA loan are that no down payment is required and there are more lenient DTI ratio requirements than FHA. However, credit score and DTI aside, there are additional requirements of service time in the military that you must have fulfilled to qualify for a VA loan.
Can I Get a Mortgage With a 720 Credit Score?
Yes, you can certainly get a mortgage with a 720 credit score. The four types of mortgage loans are Conventional, FHA, VA and USDA. The first three have already been discussed.
The USDA (United States Department of Agriculture) loan is similar to a VA loan in that it does not require a down payment. It is a government-backed mortgage that helps low-to moderate-income persons buy a home in more rural areas. However, homes in large cities and densely populated suburban areas do not qualify. The home being purchased must be in an area below 35,000 residents to qualify for a USDA loan.
A USDA loan has no minimum credit score, but most lenders prefer 620 or higher. Another advantage besides zero money down is that USDA loans have lower interest rates than other loan programs.
How Does My Income Impact Home Loan Eligibility With a 720 Score
On a USDA loan, the income limit for a household of 1-4 persons in most locations is $112,450. For households of 5-8 persons, the income limit rises to $148,450. Therefore, someone with a 720 score who makes $175,000 annually would not qualify for a USDA loan.
None of the other loans have income limits, but if there is insufficient income to afford a loan or the DTI is too high, the loan may be denied or interest rates may be higher. DTI maximums generally range from 41% to 46%, but some lenders will go up to 50% or 55% with larger down payments.
The stability of one’s income is also important. Lenders prefer those with steady paychecks to persons whose income is highly variable, as variability could affect the ability to make regular loan payments on time. However, if there is a history of earning a variable income greater than two years, many lenders will accept that without penalizing the borrower.
How To Improve My Credit Score
The higher your credit score, the lower the interest rates and fees charged. Therefore, the higher your credit score, the less expensive your monthly payments will be. Improving your credit score is excellent if you plan on buying a home within the next year or two. That’s how long it can take to improve your credit score. The best ways to improve your credit score are:
- Pay your bills on time. Debt payment history is 35% of your FICO score.
- Pay down revolving account balances, such as credit cards and keep balances low
- Keep older accounts open, as long-standing accounts boost your score.
- Diversify the types of credit you have, such as credit cards and an auto loan
- Limit new credit applications
Setting up a budget and sticking to it is one way to ensure your bills will be paid on time. A highly effective way to pay bills on time is to set up automatic withdrawals from your checking account on or before each month's due date. It’s also a good idea to monitor your credit report with Experian or another credit reporting bureau at least once a year to ensure no fraudulent activity on your accounts. Some banks, such as Wells Fargo, will monitor your credit score monthly with a “soft pull” that doesn’t affect your score.
Conclusion
A 720 credit score is considered a good credit score and will help to qualify you for every type of loan. But remember, other important qualifiers include income, debt-to-income ratio, assets and job history. You can also lower the fees and interest rate on your mortgage by increasing the size of your down payment.
A 750 credit score or higher will further reduce your interest rate, so try to improve your score as much as possible before applying for a mortgage.