What Credit Score Do You Need to Buy a House in California?
One of the biggest questions I get from first time home buyers is about credit.
“My credit score is 640. Can I still buy?”
“Do I need a 700?”
“Should I wait until my score goes up?”
Your credit score definitely matters when you are getting a mortgage. But I think a lot of buyers assume it only matters because of whether they get approved or denied.
That is not really the whole story.
Two of the biggest things your credit score can affect are your interest rate and your mortgage insurance.
And depending on whether you are looking at a conventional, FHA, or VA loan, your credit score can affect those costs very differently.
Want the quick version? Watch the short video below.
Your Credit Score Can Affect Your Mortgage Rate
In general, a better credit score can help you get a better interest rate.
That makes sense. A lender looks at someone with a stronger credit history as less risky.
But here is the part a lot of first time buyers do not realize.
Your credit score usually has a much bigger effect on the pricing of a conventional loan than it does on many FHA and VA loans.
With conventional financing, your rate and pricing can change quite a bit as your credit score changes. So someone with excellent credit may get much better conventional pricing than someone with a score in the 600s.
FHA and VA can be much more forgiving.
With many of the lenders I work with, the difference in pricing between someone around a 640 and someone with a much higher score can be much smaller on an FHA or VA loan than it would be on a conventional loan.
That does not mean every borrower gets the same rate.
Credit still matters. Your loan amount matters. Your down payment matters. Points matter. The lender matters. Mortgage rates also change every day.
But a lower credit score does not automatically mean you are stuck with a terrible mortgage rate.
Sometimes FHA or VA can make a lot more sense than a buyer expects.
VA Loans Can Be Especially Strong for Veterans
If you are eligible for a VA loan, I do not want you to overlook it.
VA loans can be one of the best mortgage options available.
The VA itself does not set a minimum credit score for its home loan program. Individual lenders can still have their own minimum score requirements, but VA is much more flexible with credit than many buyers realize.
VA financing can also allow an eligible Veteran to buy with no down payment.
And there is another huge benefit.
VA loans do not have monthly mortgage insurance.
That is true even when you finance 100 percent of the purchase price.
There may be a VA funding fee depending on your situation, although some Veterans are exempt from that fee.
VA rates can also be very competitive.
As a mortgage broker, I am able to compare VA pricing from multiple wholesale lenders. In my experience, I often see VA pricing that is very aggressive and can beat quotes Veterans receive from some large retail lenders.
If you are eligible for VA financing, it is absolutely something I would want to compare before deciding on another loan program.
Your Credit Score Can Also Affect Mortgage Insurance
This is another part that a lot of buyers miss.
If you put less than 20 percent down on a conventional loan, you will usually have private mortgage insurance, also called PMI.
The cost of that insurance can be based partly on your credit score.
So if your credit score goes down, you can potentially get hit twice.
You may have worse conventional loan pricing.
Then your monthly mortgage insurance may also cost more.
FHA works differently.
FHA mortgage insurance is not priced based on your credit score.
VA goes one step further.
There is no monthly mortgage insurance on a VA loan.
So when I am comparing conventional, FHA, and VA financing, I am not just looking at the interest rate.
I want to look at the whole payment.
What Credit Score Do You Actually Need?
This question has changed a little recently.
You will still find a lot of websites that say you need a 620 credit score for a conventional loan.
That is no longer a hard rule across the board for loans that receive an automated approval through Fannie Mae or Freddie Mac.
That does not mean credit score no longer matters.
It also does not mean someone with any credit score is automatically going to qualify.
The automated underwriting system looks at your entire financial picture.
Your credit history, income, debts, assets, down payment, and other parts of the loan all matter.
Individual lenders can also have their own requirements.
FHA Credit Scores
FHA has more specific credit score rules.
Under FHA guidelines, a borrower with a score of 580 or higher can potentially qualify for the maximum FHA financing, which allows as little as 3.5 percent down.
FHA guidelines can also allow scores between 500 and 579 with at least 10 percent down.
That does not mean every lender will approve a loan at those scores. Some lenders set their own minimum credit score above the FHA minimum.
VA Credit Scores
VA works differently.
The Department of Veterans Affairs does not set a minimum credit score for a VA home loan.
The lender still has to review your credit history and make sure you qualify for the loan. Some lenders also set their own minimum credit score.
That is another reason it can matter who you work with.
One lender may tell a Veteran no while another lender may have a completely different set of requirements.
A 640 Credit Score Does Not Automatically Mean You Should Wait
I see buyers get stuck on this all the time.
They think:
“My credit is only 640. I need to get it to 700 before I even talk to anyone.”
Maybe improving your score first would help.
But maybe it would not change your loan enough to justify waiting.
That is something we can actually figure out.
I can look at what your payment looks like today and compare it with what may happen if your credit improves.
Sometimes raising a credit score can make a pretty big difference.
Other times the difference is much smaller than the buyer expected.
That is especially true when FHA or VA financing is involved.
I would rather run the numbers than have someone sit on the sidelines for a year because they thought they needed a perfect credit score.
Conventional vs FHA vs VA With Lower Credit
Here is a simple way to think about it.
If you have excellent credit, conventional financing may have some big advantages.
If your credit is in the 600s, FHA may start looking much more attractive.
And if you are eligible for VA financing, I would absolutely want to compare VA as well.
Why?
FHA and VA pricing can be much more forgiving when it comes to credit.
FHA mortgage insurance is not priced based on your credit score.
VA does not have monthly mortgage insurance at all.
VA can also allow 100 percent financing for eligible borrowers.
That can completely change the numbers.
This is why I do not like deciding which loan is best based on one thing.
You have to compare the actual payment, cash needed to close, mortgage insurance, interest rate, and long term cost.
Your Credit Score Is Important. It Is Not the Whole Loan.
This is probably the biggest thing I want first time buyers to understand.
Your credit score matters.
But I cannot look at a 650 credit score and tell you whether you should or should not buy a house.
I need to see the rest of the picture.
How much do you make?
What debts do you have?
How much do you have saved?
What price range are you looking at?
Are you eligible for VA financing?
What type of property are you buying?
Once we know those things, we can compare the loan options and see what actually makes sense.
That is especially important here in Southern California, where even a small difference in your monthly payment can add up quickly because home prices are higher.
Should You Work on Your Credit Before Buying?
Maybe.
But do not guess.
Before paying off a bunch of accounts, closing credit cards, opening new cards, or moving money around, I would have someone look at your credit first.
Sometimes buyers do things they think will help their score and actually make the situation worse.
If your score does need some work, there may also be a pretty clear path to improving it.
I have another video coming on some of the things you can do to improve your credit before buying a home, and I will go into that in more detail there.
The Bottom Line
You do not need perfect credit to buy a house.
Your credit score can affect your interest rate and your mortgage insurance, especially on a conventional loan.
FHA can be much more forgiving when your score is lower.
VA can also be extremely forgiving when it comes to credit, and the VA itself does not require a minimum credit score.
For eligible Veterans, VA financing can offer another major advantage. You may be able to buy with no down payment and no monthly mortgage insurance.
The important thing is to compare the actual numbers instead of deciding what loan is best based only on your credit score.
If you are thinking about buying your first home in Southern California and you are not sure what your credit means for you, feel free to call or text me at 909-581-2564
I can take a look at where you are now and help you figure out what your options actually look like.
About James Taverner
I’m James Taverner, a Southern California mortgage broker who focuses on helping first time home buyers understand their options and make smart decisions with their money. I work with multiple wholesale lenders and help buyers compare conventional, FHA, and VA financing based on what actually makes sense for their situation.
My goal is to make the mortgage process easier to understand without all the unnecessary jargon.
If you are thinking about buying a home in Southern California and have questions, call or text me at 909-581-2564
James Taverner
DRE #01982735
NMLS #1369773
Broker Associate with Ever Stewart Alvarado / Lunar Home Loans
Equal Housing Opportunity
Loan approval, program availability, interest rates, and loan terms depend on borrower qualifications, property, lender requirements, and market conditions.