California is a hot market known for high housing prices, and the minimum credit score you need to be approved for a loan there will depend on several factors. These factors include how much of a down payment you have, the price of the home, and whether you qualify for government-backed loan programs.
Never forget the number one rule with loans: the higher your credit score, the better loan terms you’ll get. For a conventional mortgage in California, you typically need a minimum score of at least 600. If you qualify for certain government-backed loans, however, you may be able to buy a home with a score as low as 500.
Read on to learn about credit scores and how they affect your ability to make a home purchase.
What is a credit score?
A credit score is a number that tells lenders how likely you are to repay your debts. When you apply for credit, lenders will check your credit score to determine if you’re a good risk. Although there are several scoring models available, most lenders use FICO® scores to assess borrowers.
FICO scores are based on your financial habits—things like your payment history and the amounts you currently owe. Payment history is one of the most important, accounting for 35 percent of your FICO score
The amount of money you owe makes up another 30 percent of your FICO score. If you have high credit card or loan balances, a lender may hesitate to lend you additional funds.
FICO scores also depend on the following factors:
- Length of credit history
- Credit mix
- Number of new accounts
How does my credit score affect mortgage interest rates?
Your credit score can make it more or less expensive to borrow money. If you have a high credit score, lenders see you as more creditworthy, prompting them to offer more competitive interest rates and better terms on mortgages and other types of credit. Lending to borrowers with low scores is riskier, so lenders account for that risk by charging more interest or presenting less favorable terms for repayment
What credit score do I need to buy a house in California?
As of February 2022, the median home price in California exceeded $771,000. Home prices are especially high in San Francisco, San Diego, Los Angeles, and Oakland due to the demand for housing in and around the state’s financial and technological centers. The median home price in Orange County has now topped $1 million for the first time ever.
With home prices in California so much higher than the national average, many buyers worry about how high their credit scores need to be to live there. Credit scores are indeed a big factor, but don’t forget it also depends on your financial situation and the purchase price of the home you want to buy.
There isn’t a standard credit score that is needed across all of California, but, generally, mortgage firms and banks prefer to see a score of 600 or higher for loans. Again, that is just a general number. Different home loans have different necessary credit scores, and your relationship with your finances can help you when your score isn’t as high as you would like.
What is the average credit score needed to buy a house?
The average credit score need to buy a house depends on what type of loan you need. Conventional loans, also known as conforming loans, aren’t backed by the government. As a result, they have more stringent borrowing requirements. You typically need a minimum credit score of 620 to qualify for a conventional mortgage.
Government-backed loans—including VA loans and FHA loans—typically have more flexible requirements. If you’re interested in the FHA loan program, you can qualify for maximum financing with a minimum score of 580 and a down payment of 3.5 percent of the home’s purchase price or a credit score between 500 and 579 and 90 percent financing with a 10 percent down payment.
Can I get a mortgage with bad credit?
Anyone can experience financial difficulties, so don’t worry if your credit report has a few blemishes. You may have to wait a little while to build up your credit, but it’s possible to qualify for a mortgage even if you have a low credit score, especially if you qualify for a government-backed loan program.
What other factors do mortgage lenders look at?
Your credit score is just one aspect of your mortgage application. Lenders also look at the following factors to determine if you qualify for a home loan:
- Income: Lenders want to see that you have a steady source of income. This helps them determine if you can afford to make monthly mortgage payments.
- Bank statements: Your lender will generally ask to see your bank statements to make sure there are no unusual deposits. Reviewing bank statements can also help a lender determine if you have enough money on hand to make a down payment and cover the closing costs on a home loan.
- Assets: A mortgage lender may ask you to provide documentation related to investment accounts, insurance policies, and other assets. If you have high-value assets, a lender is likely to see you as less of a risk because you’d be able to sell those assets and use the proceeds to pay your mortgage if you run into any financial difficulties after closing on the loan.
- Loan to value: Lenders will look at the amount of your mortgage request vs. the appraised value of the home. The higher your down payment, the lower your loan to value (LTV) ratio will be.
- Comparable sales: Lenders will also evaluate comparable sales of similar homes to make sure prices are in line with market conditions.
- Credit reports: Your lender will also look at your credit report to make sure you haven’t made any large purchases or opened new lines of credit during the underwriting process. Underwriting is the process of verifying the information you provided on your application.
How can I raise my credit score?
If your credit score isn’t where you want it to be, don’t panic. Because your scores are based mostly on your financial habits, there are a few things you can do to increase them in anticipation of applying for a mortgage.
Payment history is the most important component of your credit score. If you have a low score, make it a priority to make payments on time every month. Over time, late payments have less of an impact on your score, so avoiding additional missed payments can help improve your credit.
Account balances also have a significant impact on your score. If you have a maxed-out credit card or a personal loan with a high balance, focus on paying down the debt as quickly as possible.
If you need additional guidance on increasing your credit score, a credit repair company can help.
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