Based on factors such as how much debt, which account types and what type of account history you have, your credit score will affect many financial decisions – especially the one to buy a home with a mortgage loan. You'll find that your credit score not only affects whether you can get a mortgage at all, but also the types of programs you can choose from. Further, it has a long-term effect on the interest rate you'll end up paying over the course of the mortgage. Take a look at this guide to learn more about typical mortgage credit score requirements and ways to boost your chances of approval.
Read More: How Does a Mortgage Work?
Credit Scores and Mortgage Qualification
Your credit score is very important since it – along with other factors such as your income, cash reserves and affordability ratios – will usually determine whether you can get a mortgage at all. While the exact ranges can vary by the system used, credit scores usually fall between 300 and 850. Typically, a credit score of 670 or higher will be in the "good" range or better, those under 580 fall in the "poor" range and scores in between those fall in the "fair" category. Most mortgage programs will require a "fair" or better credit score to qualify.
For example, the minimum credit score for a conventional mortgage tends to start at 620 (considered in the "fair" range). On the other hand, a borrower with a low credit score of 500 will often have very limited mortgage options, or they need to put more money down or show something else to compensate. Lenders can have even higher minimum score requirements as well, and this can make it more challenging to get a mortgage without good credit.
Read More: FICO Score vs Credit Score: What's the Difference?
Credit Score and Mortgage Rates
Mortgage rates have a strong connection to the Federal Reserve's federal funds rate that rises or falls based on changing economic conditions such as inflation levels, demand and supply. However, several other criteria related to your finances, loan and property purchase will affect the rate you pay. For example, you can benefit from lower interest rates if you have a high credit score, make a sizable down payment, choose a shorter mortgage term and buy a property in a location where lower rates apply.
Your credit score particularly matters as it will affect the overall cost of buying the house over the loan term. For the best rates across mortgage programs, myFICO says you'll want to have at least a 760 credit score, but even a credit score of 680 can yield substantial savings over somebody with just a 620 score. As of publication, a person with a 760 score who took out a 30-year mortgage could get an annual percentage rate of only 2.758 percent compared to 4.247 percent for someone with a 620 score and 3.157 percent for someone with a 680 score.
Regardless of your credit score, you should also be aware that the interest rate on your mortgage may be fixed or change over time. If you opt for a fixed-rate mortgage, then you usually pay a slightly higher rate for the advantage of more predictability for the principal and interest portions of your mortgage payments. On the other hand, an adjustable-rate mortgage offers the advantage of a lower rate at first, but later you could either experience drops or increases based on the economy, so your mortgage payment is less predictable. Most borrowers opt for the fixed-rate option.
Read More: What Credit Score Do I Need for a Mortgage?
Credit Score for Conventional Loans
Known as the most common mortgage type, a conventional mortgage tends to have stricter credit score requirements than government-backed programs and thus takes a better credit profile to obtain. For example, you can generally expect to need a minimum 620 credit score for this type of loan, but you'll get the best rates if your score is at least in the upper 700s. Conventional loans tend to offer lower interest rates in general, and down payments can be as low as 3 percent for easier accessibility to homeownership.
This loan type also usually has a conservative debt-to-income ratio of 45 percent unless you have significant cash reserves that could make that rise to 50 percent. Loan limits apply to conventional loans but can exceed those for government-backed programs, and you can use this kind of loan for a first or second property or even an investment property with fewer restrictions than other programs. However, unless you make a 20 percent down payment, you'll deal with private mortgage insurance until you can build up enough equity or you refinance the loan.
Credit Score for Jumbo Loans
Generally known as one of the most difficult types of mortgages to get, a jumbo loan usually has the highest credit score requirements since these mortgages are used to buy expensive properties that cost beyond the maximum amounts for loans backed through the government-sponsored Freddie Mac and Fannie Mae. Quicken Loans explains that you can expect to need a minimum credit score of 700 for a first home and 720 to 740 for a second home to qualify for a jumbo loan. A maximum 45 percent debt-to-income ratio usually applies too.
For example, this kind of loan would work for a $1 million property and would often require a down payment of 20 percent to qualify. Slightly higher interest rates than conventional mortgages can apply due to the larger loan amount and thus higher risk for the lender. However, your credit score can help you need a lower down payment or benefit from more competitive rates.
To boost your mortgage approval chances and benefit from a lower interest rate, you can try many options to get your score up. While you probably won't find an instant fix that boosts your score immediately, even small actions can both help your overall financial picture and add points to your credit score.
Credit Score for VA Loans
Made for past and present military members and surviving spouses who meet certain criteria, the U.S. Department of Veterans Affairs (VA) is another government-backed loan option that can help people get a mortgage with much more flexibility in credit requirements. The organization doesn't have any minimum credit score requirement at all for a VA loan and leaves that decision up to individual lenders who will often require a minimum 580 to 620 credit score. Further, the program doesn't necessarily require a down payment unless the lender requests it from you.
As with FHA loans, VA loans have restrictions in terms of properties you can finance due to a special inspection required, and the house must be your primary residence. Further, the VA rules require looking at your residual income and existing debts to determine whether you can afford the loan, but there's flexibility for the debt-to-income ratio if you have some compensating factors. If you pass all the criteria, you can benefit from a VA loan without the private mortgage insurance, as you'll instead pay a varying one-time funding fee.
Credit Score for FHA Loans
Especially helpful to first-time homebuyers who struggle with meeting minimum credit score requirements for conventional loans, the Federal Housing Administration (FHA) offers home loans with more flexibility for both the borrower's credit and debt-to-income ratio. You could get an FHA loan with a credit score as low as 500 if you can make a 10 percent down payment, while you can get one with just a 3.5 percent down payment as long as you have a credit score of at least 580. However, lenders might set higher credit score requirements, so check around.
These government-backed home loans come with some requirements and considerations to know. For example, you'll need to deal with location-based maximum loan amounts, the house you buy has to serve as your primary residence and the house must meet the FHA's standards. You'll usually need a maximum debt-to-income ratio of 43 percent, although lenders might allow a higher limit for people with good credit.
This type of loan also requires mortgage insurance with both a 1.75 percent upfront premium and then an annual premium between 0.45 and 1.05 percent that will vary based on your loan's terms.
Credit Score for USDA Loans
As with the VA and FHA loan programs, the U.S. Department of Agriculture (USDA) mortgage loan program features government backing. It stands out as an option that often doesn't require a down payment but does have income limits that vary by location. Further, a house you purchase with a USDA loan will have to be in an approved rural area. Like with the VA program, the USDA loans don't have a minimum credit score, but lenders usually look for one of at least 640.
While there may be more flexibility with your credit score, getting a USDA mortgage will involve demonstrating both your responsibility paying your current debts as well as earning a stable income. For example, you shouldn't have any recently missed payments or have an excessive debt-to-income ratio. If you qualify, you can avoid mortgage insurance and just have to pay one upfront fee when you take out the loan.
Assessing Your Creditworthiness for Mortgages
If you're wondering what your credit score looks like and which mortgage programs might be suitable, consider several options for obtaining your score online. For example, your credit card company might give you access to your credit score through one of the three bureaus – Experian, TransUnion or Equifax – as a perk on your card management portal, or you can sign up through one of these bureaus to monitor your credit score. Sites like Credit Karma and Credit Sesame offer free access, but keep in mind such scores often differ from what your lenders use.
Along with looking to see if you have a high or low credit score, it helps to get your credit report so you can assess your income versus your debts and make sure homeownership is affordable. The Federal Trade Commission recommends using the AnnualCreditReport.com website to get free credit reports through the three bureaus. Along with getting a good picture of your monthly debt payments, checking your credit reports can help you identify areas of improvement as well as fix mistakes you find.
After you've looked at your credit information, you could have some concerns that your credit score or debt-to-income ratio looks like a possible stumbling block to qualifying for a mortgage. In such cases, you might hold off on a mortgage until you've improved your credit situation. However, if you need a place to live right now, you could look into asking someone close to you to serve as a co-signer. That person will be held financially responsible, and the lender will use their income and credit information in exchange to help you qualify.
Read More: How to Check Your Credit Score
Raising Your Credit Score
To boost your mortgage approval chances and benefit from a lower interest rate, you can try many options to get your score up. While you probably won't find an instant fix that boosts your score immediately, even small actions can both help your overall financial picture and add points to your credit score. Here are a few things to consider doing:
- Work toward low balances: Your amounts owed make up 30 percent of your score, so you can help raise your score if you pay down the balances. You have some flexibility in how you do this. If you can't pay off your entire credit card, then try two payments a month or just adding some extra money to your regular payment.
- Stop applying for new credit: With a mortgage application in the future, you won't want to apply for a new credit card since this will lower your credit score due to a few connections. First, this reduces your credit history length and adds a hard inquiry. Second, if you use the credit offered, you have more debt that will hurt your score. Instead, focus on keeping your current credit lines open and reducing the balances so they have a positive effect on your credit history.
- Avoid late payments: With payment history accounting for 35 percent of your credit score, you won't want to pay anything late or miss payments. Use automatic bill pay if possible or set up a reminder system so you always pay on time.
- Consider your credit limits: While you won't want to open new accounts since that affects your credit history length and adds a hard inquiry, you might qualify for credit line increases that can lower your overall utilization percentage. However, make sure that this doesn't involve a hard pull first.
Read More: How to Get a Credit Score of 900 Points
- myFICO: What Is a FICO® Score?
- Capital One: What Credit Score Is Needed to Buy a House?
- U.S. Department of Housing: Let FHA Loans Help You
- Consumer Financial Protection Bureau: Special Loan Programs
- Consumer Financial Protection Bureau: Conventional Loans
- Consumer Financial Protection Bureau: FHA Loans
- U.S. Department of Veterans Affairs: VA Guaranteed Loan
- U.S. Department of Veterans Affairs: Chapter 4. Credit Underwriting
- Consumer Financial Protection Bureau: Seven Factors That Determine Your Mortgage Interest Rate
- Consumer Financial Protection Bureau: Understand Loan Options
- myFICO: Home Purchase Center
- Consumer Financial Protection Bureau: What Is a Jumbo Loan?
- Rocket Mortgage: Jumbo Loans: What Are They And How Do They Work?
- USDA: Single Family Housing Guaranteed Loan Program
- Consumer Financial Protection Bureau: Where Can I Get My Credit Score?
- Federal Trade Commission: Free Credit Reports
- Consumer Financial Protection Bureau: How Do I Get and Keep a Good Credit Score?
- Lending Tree: Minimum Mortgage Requirements for 2021
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.