A few weeks back, I got a super, super shiny Discover it card in the mail. It’s blue and it’s orange and I love it. Okay, love is a little strong but I’m really liking my first credit card.
I don’t ‘love’ it because of its credit limit. No, I love it because it will help me buy a house one day. See, I don’t like buying much of anything. That’s why I’m 25 and this is my very first card. But, one day in the not-so-distant future, I will want to buy a house. That’s why I’m trying to build my credit.
Right now my FICO credit score is 708. Not bad. Not great. It’s right in the middle for 2 reasons:
1. I had $16,500 of school loans I paid off. (the good)
2. I haven’t used credit in 3 years. (the bad)
Today, I read a post on FinancialSamurai.com saying a 740 is the score you want when buying a house. Here’s a quote from the author:
After refinancing multiple properties multiple times and talking to various mortgage officers since 2003, once you have over a 740 credit score, it doesn’t matter how much higher your credit score is. You will always be offered the best borrowing terms.
After reading this, it looks like my target score is 740. That should be doable in just a few years of responsible credit card use. But is there more to the story?
Minimum Score Needed
A common type of government loan is a Fannie Mae loan. They offer what they have called a HomePath loan. Both SFgate.com and Globalpost.com say a 620 score is needed to be considered.
If you really want to get into a home, you don’t need a score of 740. FHA loans are considered the easiest to obtain. The minimum credit score to score one of these loans is 580. Plus, with one of these loans you only need a 3.5% down payment. I could buy a nice house right this second if I wanted to.
SFGate.com recommends you get at least a 650 credit score before you think about approaching most non-government-backed loans.
Obviously, unless you have an excellent score, go with a government-backed loan.
As stated by Financial Samurai, you need a 740 score or above to qualify for the best rates. Yes, an 850 credit score (the best a person can get) will likely get you the same interest rate as a 740 score.
Note: I did find one reputable site claiming a 760 would assure you the best interest rate. But every single other reputable source says 740 so I’m sticking with that.
You may be able to get your interest rate decreased in other ways if you don’t have an excellent score. For instance, if you offer a large down payment, you may get a break on the interest rate.
Also remember there are several different credit scores your lender will likely use to assign you an interest rate. I wish it were as easy as looking up your FICO score with a service like Mint.com and being prepared to receive a mortgage. But, alas, it is more complicated. There are three different FICO score versions which can be used by a lender:
- Equifax Beacon 5.0
- Experian/Fair Isaac Risk Model v2
- TransUnion FICO Risk Score 04
This Is How They Decide Which of the Three Possible Scores to Use:
- If all three scores are different, they use the middle score
- If two of the scores are the same, they use that score, regardless of whether the two repeated scores are higher or lower than the third score
Since I won’t be purchasing a house for awhile, I’m going to try to get my credit as high as possible. As long as I don’t fall below 740 on any of these formula outputs, I should be perfect.
This is pretty exciting if you ask me. You and I can get the best interest out there with just a 740 credit score!!! Now that we have this question cleared up, what kind of house do you want to buy? I like older homes. I think I would like a French revival.