What credit score is needed to buy a house?

Dear Keeping Score,

I am buying a house in five months. I also want to apply for a furniture store credit card, which they are offering with no payments until 2021. My question is, how long do I have to apply for this credit card so that it won’t affect my credit when closing on my new home? – Al

Dear Al,

Oh, the excitement and enthusiasm of new home buying! I’m not kidding. It is a heady time and the tendency is to dive in.

For years I taught first-time homebuyers that caution is essential when venturing into homeownership, at least until all the dust and excitement have settled. Unexpected expenses can crop up without notice, and the difference between success and failure can come down to being a little more cautious than you might think is necessary.

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There is no doubt in my mind (or that of many bankers) that a good credit score is essential to obtaining the lowest mortgage rate. But as I point out in my book, “Credit Repair Kit for Dummies,” what a balanced life calls for is “good enough” credit.

Some people I have counseled wouldn’t hear of anything but perfect credit. But the pursuit of perfect credit is nearly impossible and the maintenance of perfect credit is truly impossible. What I suggest is that people strive for a credit score that will allow them to do what they want. In the mortgage game, a score of 760 will get you all the same benefits as a score of 780 or even 800.

See related: Can you get approved for a home loan without a credit score?

Credit score effect depends on what else is in your credit report

As you know, opening a new account will cause a drop in your credit score. The FICO category new credit accounts for 10% of a typical FICO score. This is because new credit represents an unknown and new risk factor. Once the new and unknown risks become old and known, your score will return to its former glory. The amount of the point drop and the speed of its recovery depend on how much additional data is in your credit report already.

If you have only a year or two of credit history, your score will drop significantly. The older your credit history (and probably you) the less it will be affected. I opened a new Chase credit account recently. I have an extensive credit history. My score only dropped a few points and for only a few months.

For me, it was no big deal. If your score is tops and you have a deep credit history then your risk of missing your best rate will be lessened. But, if you are anywhere near the margins of the scoring categories below, I’d suggest you wait until you get your mortgage before rolling the scoring dice.

Don’t get me wrong – I understand the temptation of furnishing that new house now and putting off the payments for a couple of years. But upon closer inspection, you may see that this is not the great deal you may think it is at first glance.

No payments and no interest until 2021 will only work to your advantage if you can actually pay it off by 2021 and without a single late or missed payment. But doing that could prove difficult with a new mortgage as well. One slip-up and all the interest seemingly forgiven will come back to stay like an unwanted relative.

I think it is more important for you to know what you need to do to be sure that your score is in its best possible shape before you take on a mortgage. This is because your credit score will have a direct effect on the interest rate you will qualify for.

A lower credit score means higher interest payments

While every lender has its own minimum score requirements, generally speaking your score must be at least 500. But those in the 500 to 619 range will find mortgage rates that are significantly higher than the lowest current rate. In addition, qualifying for a mortgage for those in the lower range is difficult and expensive, both in terms of the interest rate and the down payment requirement.

Let’s look at the current spread of rates based on scores (with other factors not considered). I’m not even going to try to show rates below a score of 620 as this is the old subprime category. A score this low may have too many issues to cover in this article.

Even the smallest difference in the rate you qualify for will make a huge difference over the life of the mortgage. According to MyFICO, given a loan of $216,000, a person with a FICO score of 760 or better will pay $199 less per month for a $216,000 30-year, fixed-rate mortgage than a person with a FICO score of 620 – that’s a savings of $2,388 per year. Over 30 years, that’s a lot of money to throw away!

Source: MyFICO and Informa Research Services

See related: What to do if your holiday shopping tanked your credit score

Hold off on opening a new account for now

That is why it is so important to do everything you can to be sure your credit is in great shape before you jump in. Taking on new credit of any kind, whether it’s this furniture loan or a new car payment, can be a problem if your score and credit history are not well established. New credit inquiries will stay on your credit report for two years, but FICO only counts those within the last 12 months in their scoring matrix. If you had a year before you were planning to get a mortgage, you would probably be fine.

But you don’t. And much depends on what else is in your file. For now, be sure to make all of your payments on time and if you have other debt, work on getting your balances down. Payment history and credit utilization make up a whopping 65% of your score.

Still, even with a pristine credit record, I would hold off opening a new account this close to buying a home out of an abundance of caution. Once you have secured your mortgage, and the passion of new home buying subsides, you can open new accounts then. Remember to keep track of your score!