If you’re hoping to buy a home in the near future, there are a number of financial factors you’ll need to consider.

One of the factors that all lenders will consider when determining whether or not to approve you for a mortgage is credit score.

In this article, we’ll lay out the minimum and ideal credit scores that are needed for getting approved for a home loan.

Determining Your Score

As you may guess, credit reporting is a complicated business. There are three main reporting companies that lenders use to determine your credit: Experian, TransUnion, and Equifax. These companies largely collect the same data about your finances, but can have minor variations. Lenders will take these scores and use the median or middle score to determine your credit rating.

Thanks to the Fair Credit Reporting Act, Americans have the ability to confirm the accuracy of their reports.

If you want to find your credit score, there are a number of online reporting agencies that will show you your report for free on an annual or monthly basis.

Minimum credit scores

Depending on the type of loan you’re applying for and which lender you are pursuing, minimum credit scores vary.

For those seeking first-time homeowner (FHA) loans, you’ll need a credit score of at least 580 to qualify for a 3.5% down payment. A score lower than this amount and you will need to put at least 10% down.

Since FHA loans are insured by the government, you are more likely to be approved if you have a low or “poor” or “bad” credit score (usually anywhere from 300 to 650).

Another type of loan that could help people with low credit is offered by the Department of Veteran’s Affairs. These loans, known as VA loans, are guaranteed, in part, by the government. However, the loans are still approved and distributed by lenders who all have varying minimum credit requirements. A good benchmark is that you’ll need a score of at least 620 to be approved.

Minimum isn’t ideal

While you may get approved for a loan with a low credit, this isn’t always a reason to celebrate.

Lenders use your credit score, among other things, to help determine the interest rate of your loan. A lower score often means a higher interest rate.

While 1 or 2 percent can seem like a small number, it can mean paying tens of thousands of dollars more in interest over the span of a thirty-year loan.

To illustrate the importance of one percent, consider the following. If you owe $200,000 on a home and intend to pay it over 30 years, you will pay $103,000 in interest at 3% and $143,000 at 4% – that’s a difference of $40,000.

Rather than shooting for the minimum credit score, a better approach would be to build credit while saving for a down payment. Someone with a credit score of 740 or higher will be seen by most mortgage lenders as an ideal person to lend to.

Of course, life doesn’t always allow for the ideal situation. So, do your best to save and build credit, and be sure to shop around for the best rates when you’re ready.