Buying a Home? Here’s What to Do If Your Credit Score Isn’t 720+

• Admin |
• March 26, 2025 |
• Business And Finance |

Why Your Credit Score Matters When Buying a Home

 

How Lenders Use Your Credit Score

 

When you apply for a mortgage, lenders assess your credit score to determine how much of a financial risk you pose. A higher score signals responsible credit behavior, making you a more attractive borrower. 

On the other hand, a lower score raises red flags, leading lenders to either increase your interest rate or, in some cases, deny your application altogether.

Credit scores typically fall into these categories:

• Excellent (750+) – Easiest approval, lowest interest rates
   
• Good (720-749) – Competitive rates and favorable terms
   
• Fair (620-719) – Higher interest rates, limited loan options
   
• Poor (Below 620) – Difficult approval, possible need for alternative loans
   

Since your score plays a major role in mortgage approval, understanding its impact can help you make informed decisions before applying for a home loan.

 

The Link Between Credit Score and Mortgage Rates

 

Your credit score doesn’t just determine whether you qualify for a loan—it directly affects the interest rate you’ll pay. Even a small difference in your rate can lead to thousands of dollars in additional costs over the life of a mortgage.

For example, consider a $300,000 home loan:

• With a 720+ credit score: You may qualify for a 5.5% interest rate
   
• With a 650 credit score: Your rate might increase to 6.8% or higher
   

Over a 30-year loan, the difference in monthly payments and total interest paid can be significant. That’s why improving your credit score—even by a few points—can make a big impact when securing a mortgage.

 

Can You Buy a House with a Credit Score Below 720?

 

Yes, but expect trade-offs. A lower score means higher interest rates, stricter lending terms, and possibly a larger down payment requirement.

 

• Higher Costs: Lenders reserve the best rates for 720+ scores. Below that, you’ll pay more in interest.
•  
• Loan Options Exist: FHA loans (min. 580), VA loans (flexible for veterans), and some conventional loans (as low as 620 with high down payment) can work.
•  
• Down Payment & DTI Matter: A larger down payment (20%+) and a debt-to-income ratio below 43% improve approval chances.

 

Buying a home with a credit score below 720 is possible, but it comes with higher costs and stricter requirements. The key is finding the right loan type and taking steps to improve your financial profile before applying.

 

Minimum Credit Score Requirements for Different Loan Types

 

Not all mortgages have the same credit score requirements—some are stricter, while others offer flexibility. Here’s what you need to know:

 

• Conventional Loans: Most lenders require 620+, but a 740+ score lands the best rates and lower fees.
•  
• FHA Loans: If your score is 580+, you can qualify with just 3.5% down. Have a 500-579 score? A 10% down payment is required.
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• VA Loans: No fixed minimum, but lenders generally look for 580-620. If you’re eligible, this is one of the best loan options.
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• USDA Loans: Usually require 640+, but some lenders allow lower scores with strong financials.

 

What This Means

 

A lower score doesn’t shut the door on homeownership, but it limits your options and increases costs. The higher your score, the better the deal. If you’re below 720, there are still ways to secure a good loan—you just need to know where to look.

 

Conventional Loans vs. Government-Backed Loans

 

When choosing a mortgage, you’ll typically encounter two categories: conventional loans and government-backed loans. Understanding the differences can help you find the best option for your financial situation.

 

Conventional Loans: Higher Standards, Lower Costs

 

• Credit Score Requirement: Typically 620+, but a 740+ gets the best rates.
•  
• Down Payment: As low as 3%, but 20% avoids private mortgage insurance (PMI).
•  
• Best For: Buyers with good to excellent credit who can afford a larger down payment.

 

Government-Backed Loans: Flexible Credit, Lower Barriers

 

• FHA Loans: 580+ score qualifies for 3.5% down, but lower scores require 10% down. Ideal for first-time buyers or those with credit challenges.
•  
• VA Loans: No set minimum score, but 580-620+ is common. No down payment or PMI, making it a great choice for eligible veterans.
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• USDA Loans: Typically, 640+ is required. Offers 0% down for homes in rural or suburban areas.

 

Which One Should You Choose?

 

If your credit score is below 720, government-backed loans can offer better terms and lower down payments. However, if you qualify for a conventional loan, you’ll avoid extra fees like mortgage insurance.

 

How a Credit Score Below 720 Affects Interest Rates and Loan Terms

 

Your credit score isn’t just a number—it directly influences how much you’ll pay for your home over time. A score below 720 can mean higher interest rates, stricter loan terms, and even larger down payment requirements.

 

The Impact on Interest Rates

 

Lenders use risk-based pricing, meaning the lower your score, the higher your interest rate. Here’s how different scores can affect a 30-year fixed mortgage:

• 760+ → Best rates (e.g., 6.5% APR)
•  
• 720-759 → Slightly higher rates (e.g., 6.75% APR)
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• 680-719 → Noticeable increase (e.g., 7.25% APR)
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• 620-679 → High rates (e.g., 8%+ APR)
   

A 1% increase in interest could add tens of thousands to your total mortgage cost!

 

Stricter Loan Terms

 

If your score is below 720, lenders may require:

 

• A larger down payment (e.g., 10-20% instead of 3-5%)
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• Private Mortgage Insurance (PMI) if the down payment is below 20%
•  
• More financial documentation to prove stability
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• Higher debt-to-income (DTI) ratio restrictions

 

A lower credit score doesn’t mean homeownership is out of reach, but it will cost you more. 

 

The Cost of a Higher Interest Rate

 

A lower credit score doesn’t just affect approval odds—it significantly impacts how much you’ll pay for your home in the long run. 

Even a small increase in your interest rate can add tens of thousands of dollars to your mortgage.

 

How Much More You Might Pay Over the Life of a Loan

 

Let’s compare two homebuyers purchasing a $300,000 home with a 30-year fixed mortgage:

 

Credit Score	Interest Rate (APR)	Monthly Payment	Total Interest Paid
760+	6.5%	$1,896	$382,000
720-759	6.75%	$1,945	$400,200
680-719	7.25%	$2,048	$437,280
620-679	8.0%	$2,201	$492,360

 

• A buyer with a 680 credit score could pay over $55,000 more in interest than someone with a 760+ score!
•  
• Lower scores can also mean higher private mortgage insurance (PMI) costs, further increasing your monthly payment.

 

What Can You Do?

 

Since every percentage point matters, improving your credit before applying can save you thousands.

 

7 Ways to Improve Your Mortgage Eligibility Before Applying

 

Enhancing your credit profile before applying for a mortgage can lead to better loan terms and lower interest rates. Here are seven actionable steps to boost your mortgage eligibility:

 

          1. Review and Fix Errors on Your Credit Report

•               Obtain your credit reports from major bureaus and scrutinize them for inaccuracies. Dispute any errors you find, as they can negatively impact your score.

 

          2. Lower Your Credit Utilization

•              Aim to use less than 30% of your available credit. High utilization can signal financial stress to lenders. Paying down balances can improve this ratio and, consequently, your credit score.

 

           3. Make On-Time Payments a Priority

•              Consistently paying bills on time is crucial, as payment history significantly influences your credit score. Consider setting up automatic payments or reminders to avoid missed due dates.

 

           4. Avoid New Credit Inquiries

•              Each new credit application can result in a hard inquiry, slightly lowering your score. Limit new credit accounts in the months leading up to your mortgage application.

 

           5. Reduce Debt-to-Income Ratio

•              Lenders assess your debt-to-income (DTI) ratio to evaluate your ability to manage monthly payments. Lowering your DTI by paying off debts can make you a more attractive borrower.

 

           6. Consider a Larger Down Payment

 

•              Saving for a larger down payment can offset a lower credit score by reducing the lender's risk, potentially leading to better loan terms.

 

           7. Work with a Mortgage Broker

 

•              A broker can help identify lenders more likely to approve your application based on your financial situation, especially if your credit score isn't ideal.

 

By implementing these strategies, you can enhance your creditworthiness and improve your chances of securing favorable mortgage terms.

 

Loan Options If You Have Less-Than-Perfect Credit

 

Securing a mortgage with a credit score below 720 is feasible, thanks to various loan programs designed to accommodate borrowers with less-than-perfect credit. Here are some options to consider:

 

FHA Loans: A Solution for Low Credit Scores

The Federal Housing Administration (FHA) offers loans tailored for individuals with lower credit scores:

 

• Credit Score Requirements: A minimum FICO score of 580 qualifies you for a down payment as low as 3.5%. If your score is between 500 and 579, you may still be eligible with a 10% down payment.
   
• Benefits: More lenient underwriting standards and lower down payment requirements make FHA loans accessible to many first-time homebuyers.
   
• Considerations: Borrowers are required to pay mortgage insurance premiums (MIP), which increase the overall loan cost.
   

 

VA Loans: The Best Option for Eligible Veterans

 

For veterans, active-duty service members, and certain members of the National Guard and Reserves, the Department of Veterans Affairs (VA) offers favorable loan options:

• Credit Score Requirements: The VA doesn't set a minimum credit score; however, many lenders prefer a score of 620 or higher.
   
• Benefits: VA loans often require no down payment, have competitive interest rates, and do not require private mortgage insurance (PMI).
   
• Considerations: A one-time VA funding fee is typically required, which can be financed into the loan amount.
   

 

USDA Loans: Financing for Rural and Suburban Homes

 

The U.S. Department of Agriculture (USDA) provides loans for eligible rural and suburban homebuyers:

• Credit Score Requirements: While the USDA doesn't mandate a minimum credit score, lenders often look for a score of 640 or higher.
   
• Benefits: These loans offer 100% financing, meaning no down payment is required, and they come with reduced mortgage insurance costs.
   
• Considerations: Properties must be located in eligible rural or suburban areas, and income limits apply.
   

 

Alternative Lending Programs

 

If traditional loan options aren't suitable, alternative financing methods may be explored:

 

• Subprime Loans: Designed for borrowers with poor credit histories, these loans come with higher interest rates and less favorable terms.
   
• Lease-to-Own Agreements: This arrangement allows you to rent a home with the option to buy it later, giving you time to improve your credit.
   
• Seller Financing: In some cases, the seller may agree to finance the purchase directly, bypassing traditional lenders.
   

Important Note: While these alternative options can provide pathways to homeownership, they often come with higher costs and risks. It's crucial to research and understand the terms before proceeding.

 

Final Steps Before Applying for a Mortgage

 

As you near the end of your home-buying journey, completing these key steps can enhance your readiness and improve your chances of securing favorable mortgage terms:

 

1. Understand Pre-Qualification vs. Pre-Approval

 

•     Pre-Qualification: An initial assessment based on self-reported financial information, providing an estimate of the loan amount you might qualify for. It's a quick process but doesn't involve verification of your financial details. ​
•  
•     Pre-Approval: A more thorough evaluation where lenders verify your financial information, such as income and credit history, resulting in a conditional commitment for a specific loan amount. This process carries more weight with sellers. ​

 

2. Choose the Right Lender

 

•     Selecting a lender aligned with your financial needs is crucial:
•  
•     Compare Offers: Obtain loan estimates from multiple lenders to evaluate interest rates, fees, and terms. ​
•  
•     Ask Questions: Inquire about loan options, eligibility requirements, and the application process to ensure clarity. ​

 

Assess Customer Service: Research lenders' reputations and reviews to ensure responsive and transparent communication. ​
 

 

3. Prepare Your Financial Documents

 

Organizing necessary documents can streamline the application:

 

•     Proof of Income: Recent pay stubs, W-2 forms from the past two years, and tax returns, especially for self-employed individuals. ​
•     Asset Statements: Bank and investment account statements to demonstrate financial stability. ​
•     Credit Information: Be prepared for the lender to conduct a credit check and address any potential issues.​

 

By completing these steps, you position yourself as a well-prepared buyer, ready to navigate the mortgage process confidently.

 

Mortgage Application Made Simple

 

Applying for a mortgage requires careful preparation. By managing your credit, exploring suitable loan options, and organizing necessary documents, you enhance your approval prospects. Clear communication with your lender and seeking professional advice can further support your journey toward homeownership.