Understanding Credit Scores In House Purchasing

Understanding Credit Scores In House Purchasing
by John Carlucci - July 20, 2022

In addition to affecting your ability to get a mortgage, your credit score can also affect the interest rate and terms. To determine whether you can afford the home you want, lenders consider factors like your score, employment, income, and debt. A higher credit score means you won't be burdened with higher costs, making your mortgage cheaper overall. Although some mortgage programs accept lower credit scores, the higher your score, the more affordable your mortgage will be.

Credit Scores And Mortgages Statistics

A median credit score of 786 is the average for Americans taking out mortgages, according to Federal Reserve Bank of New York data for Q2 2021.

The highest average credit scores in the country are found in Minnesota, New Hampshire, and Vermont, while the lowest are found in Mississippi, Louisiana, and Alabama, according to VantageScore.

Experian data indicates that the average mortgage debt in 2021 was $229,242. The average mortgage debt of Generation X borrowers is $259,100, the highest among all generations.

Homebuyers' Credit Score Requirements

To qualify for some types of mortgages, you must have a certain credit score.

The minimum credit score for a conventional loan is 620, but you should aim for a score of 740 or higher if you want to make a lower down payment, get a better interest rate, and save on private mortgage insurance.

It is possible to receive an FHA loan with as little as a 580 or 500 credit score, depending on the down payment amount. Although, lenders can still impose higher minimum credit scores, making it quite challenging for people with low credit scores to get an FHA loan.

In order to qualify for a VA loan, minimum credit requirements are not set by the Department of Veterans Affairs (VA), but VA lenders can have their own, usually in the low- to mid-600 range. USDA loans don't have credit score requirements by U.S. Department of Agriculture standards, but lenders will still require 640 as a minimum.

Loan TypeMinimum Credit Score Requirement
USDANo requirement, but generally 640
VANo requirement, but generally low- to mid-600s

Credit Scores by State

Americans' credit health varies from state to state. According to VantageScore data from December 2021, Minnesota's average credit score is 724, followed by New Hampshire's (720) and Vermont's (719). The lowest average scores are in Alabama (670), Louisiana (668), and Mississippi (660).

Overall, credit scores in the Northeast and Pacific Northwest are higher, while those in the Deep South are lower.

Age-Specific Mortgage Debt

At a lower income level, Americans usually start borrowing when they are young adults and face major expenses such as housing and education. With rising incomes, they tend to borrow less in middle age. Paying off loans increases deleveraging as Americans get older.

GenerationAverage credit scoreMortgage debt on average
Generation Z660$192,276
Generation X685$259,100
Baby boomers724$198,203
Silent Generation729$163,254
Source: Experian State of Credit Report, 2021

Mortgage Rates And Credit Scores

Higher credit scores usually result in lower mortgage rates and lower monthly payments, as well as lower interest overall. An estimated monthly payment for a 30-year fixed-rate mortgage of $286,400 would be as follows:

Credit scoreAPRMonthly mortgage paymentInterest total
APRs as of Feb. 2021. Source: myFICO

Other Factors Considered By Mortgage Lenders

The following factors are taken into account by mortgage lenders, along with your credit history and score:

Ratio of debt-to-income (DTI) – This ratio is a critical indicator of your affordability to pay your mortgage. Although you may have good credit and a stable income, a high DTI ratio could limit your options.

Income and employment history – Lenders want to see evidence of a consistent income source. It is a plus if you have worked for the same company for more than two years, and you should be prepared to provide tax returns from the past two years.

Financial strength – If you have substantial savings, investments, and retirement accounts, you may be more attractive to lenders.

Down payment – Making a larger down payment has the potential to increase your approval chance and improve your interest rate, but make sure your emergency savings aren't depleted.

The Bottom Line

The average mortgage borrower carries a six-figure debt even after they reach retirement age, making it one of the biggest financial commitments they'll ever make. Getting the best mortgage rate and terms requires improving or maintaining your credit score before being scrutinized.

If you are considering buying a house, you should take the time to understand the essential financial requirements and how they will affect the overall price. Learn more about how income affects the interest rate so you can reduce your loan amount and expand your home-buying price range.

Vikki Gerrard La Crosse WI Explores Crafting with Upcycled Materials
Vikki Gerrard La Crosse WI Explores Crafting with Upcycled Materials
Do you ever take a good, hard look at all the items in your home that are no longer being used? Instead of letting those objects collect dust and occupy space, why not transform them into something new and exciting? ...
6 Reasons to Consider Outsourcing Order Fulfillment for Your E-Commerce Business
6 Reasons to Consider Outsourcing Order Fulfillment for Your E-Commerce Business
Outsourcing order fulfillment offers numerous advantages beyond merely not having to do the work yourself.   To run a successful business, you must meet your consumers’ requirements and expectations. Those expectations are high when it comes to order fulfillment. Delayed, missing, ...
Factors To Consider When Selecting A Location For Your Fulfillment Center
Factors To Consider When Selecting A Location For Your Fulfillment Center
You know what they say in the real estate realm,  location, location, location! This is particularly true when choosing the best site for your fulfillment warehouse.  Whether you're a large corporation looking for a new fulfillment warehouse or a garage-based ...
How Much Are Closing Costs
How Much Are Closing Costs?
One surprising statistic in the world of real estate is that the average homebuyer pays between 2% and 5% of their home's purchase price in closing costs. So, how much are closing costs really? And who is responsible for paying them?  As ...
What Is a One Time Close Construction Loan Exploring This Unique Home Loan Product
What Is a One Time Close Construction Loan? Exploring This Unique Home Loan Product
If you’re the kind of person who has always dreamed of walking into a home that fits you like a glove, then you’re likely interested in building a new home. Maybe you have a piece of scenic property that you’d ...
1 2 3 73
Prudential Cal strives to provide the most detailed information about the real estate industry. We assist people in making the best decisions possible by offering unique insights into the global real estate market and advice for both homebuyers and sellers.
Additional Information
Copyright © 2023 Prudential Cal. All Rights Reserved.
DMCA.com Protection Status
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram