If Your Credit Score Is Below This Number, Buying A House Is No Easy Feat

The dream of homeownership is alive and well. According to a survey performed by Realtor.com, 75% of Americans believe that owning a home is a crucial component of "the American Dream." Meanwhile, the true cost of that dream now sits at roughly $4.4 million over the course of a lifetime, per an Investopedia report. The average price of a home is decidedly lower than this lifetime figure, but the median U.S. sale price of a home still hovers around $410,800, per the St. Louis Federal Reserve Bank. Housing prices have cooled off some since a highwater mark in mid-2022, but buying in this marketplace remains unattainable for many middle and lower class individuals and families. One reason has nothing to do with saving, but instead focuses on credit scores. In no uncertain terms, there's a hard floor on traditional lending options that exists at 620. If your credit score is below this figure, buying a home becomes vastly more difficult.

A score of 620 sits near the bottom of the "Fair" designation, and Experian notes that those in this band (580 to 669) showcase a particular risk for lenders. That's because 28% of consumers with this score have a high likelihood of becoming severly delinquent on their repayments. It's perhaps this heightened risk of default that has placed the threshold to enable mortgage lending about halfway up the fair segment. With 33% of the American population sporting a credit score at or below 669, though, plenty of hopeful homeowners lack — or are hovering just above — the prerequisite number that opens up the possibility of securing financing. Fortunately, there are lending options for those whose credit score is on the lower end of the range — even if they're not ideal. 

Federal Housing Administration (FHA) loans are available to borrowers with credit scores as low as 500, so the 620 magic number isn't a completely rigid requirement; it's just a benchmark that gets you a better deal. Per the FHA Single Family Housing Policy Handbook, FHA loans require just a 3.5% down payment with a 580 credit score, allowing Americans from across the financial spectrum to become a homeowner. Meanwhile, those with a score in the range of 500 to 580 can get a loan with a 10% down payment. It might be better said, then, that the minimum credit score absolutely required to secure mortgage financing is 500, but this comes with other strings, including mandatory Mortgage Insurance Premiums and higher interest rates.

Also, you can raise your credit score if you're hoping to soon join the buyers' side of your local real estate marketplace. Reducing your reliance on credit products and getting serious about paying off existing balances will naturally start to raise your score. Reducing your utilization rate, making timely payments, and remembering not to close older accounts even if you've paid off the balance and no longer use the card all help in this endeavor. The 30% utilization mark should be one of your first targets, according to Equifax. If your ratio is above this benchmark, crossing it can make a significant impact in raising your credit score. The higher your score, the more options you'll have when applying for a loan. Spending an extra six to 12 months saving, tackling existing debts, and living frugally can transform your ability to borrow and buy a home. And once you hit this credit score, you'll get access to the best interest rates available.