When shopping for a house, you may feel concerned about getting approved for a mortgage, especially if your credit score needs some work. While lenders and mortgage programs usually require fair to good credit scores, the good news is that even those with poor credit can qualify for certain government-backed programs.
However, keep in mind that your FICO score is just one part of the picture and that you'll need to meet or exceed all other financial requirements. Read on to learn about typical credit scores for mortgages along with program-specific information to consider.
Typical Mortgage Credit Score
When looking at credit scores, know that the range usually goes from 300 to 850, where factors such as your current debt, repayment history, length of credit history, recent inquiries and type of accounts all impact the number. Optimal credit scores include the 670 to 739 range for good credit, 740 to 799 range for very good credit and 800 to 850 range for excellent credit. Anything from 580 to 669 is just fair credit, while a score below that range is considered poor.
The Motley Fool reported that the average American in 2019 had a credit score of 706, but this number tended to be lower for people under 50 and higher for the 60-plus age group. However, according to Quicken Loans, having a higher credit score of at least 740 can provide you with access to the most mortgage options in 2020. This means that such a score can provide better interest rates and a better likelihood of qualifying for conventional loan programs.
Data from Forbes provided some additional insight into the actual scores of mortgage borrowers in 2020. It showed that the majority of homebuyers had scores between 700 and 850. Just around 7 percent of mortgage borrowers had scores below 600, although around 18 percent had scores in the 650 to 699 range. This shows that while it's less common, it's still possible to qualify for a mortgage if you have fair or even poor credit.
Exploring Conventional Loan Requirements
Available whether you're buying your first home or an investment property, conventional loans come with advantages like a competitive interest rate and low down payment, in most cases. The government doesn't back these loans like it does for some alternative mortgage options.
If you're looking into getting a conventional loan, expect to need a minimum credit score of 620, although lenders and loan programs may allow for lower scores or require higher ones depending on your whole financial picture. For example, conventional mortgages backed by Fannie Mae require a 620 credit score as a minimum for most situations. However, their rules show that you'd need a score of 640 for an adjustable-rate mortgage with manual underwriting, and some first-time homebuyer programs may allow for lower scores for those who meet all other requirements.
Besides having an appropriate credit score, conventional loans require you to show you meet other financial criteria. For example, you'll need a minimum down payment of 3 percent of the home's purchase price, and private mortgage insurance is usually required unless you can put 20 percent down. Depending on the lender, your debt-to-income ratio can't be more than 45 or 50 percent.
Comparing VA Loan Requirements
If you or your spouse has served the country in the military and can meet active or reserve service requirements, then the Department of Veterans Affairs offers mortgages for primary residences. A VA loan comes with numerous benefits, such as flexible credit requirements and no need to worry about mortgage insurance or a down payment.
What especially sets VA loans apart is the fact that this option doesn't have a set minimum credit score requirement. Instead, the VA considers your whole situation, including your income, current debt, living expenses and past credit history, to make the decision. With that said, you can increase your chance of approval if you have a score of at least 660, as lenders have the option to set their own requirements for the credit score to be more strict.
The VA likes to see that you have a debt-to-income ratio that doesn't exceed 41 percent, but it will consider higher ratios if you have something to compensate for that. For example, you might have a high income that can support the loan, or you could have significant cash reserves.
Considering Jumbo Mortgage Requirements
Traditional mortgage programs have property price limits, and this can raise issues if you live somewhere very expensive. In those situations, jumbo loans allow you to borrow a very large amount of money but have more stringent requirements across the board.
In most cases, you'll need a minimum credit score of 700 to qualify. However, lenders may allow you to get approved with scores in the high 600s and a strong financial profile. Since these loans can have you taking on seven figures of debt, consider aiming for a credit score in the very good to excellent range for the best results.
Keep in mind that you'll need a hefty down payment of 10 percent or more for these loans. Plus, your lender will want to see that you have plenty of cash reserves left over. Your debt-to-income ratio usually has to be 45 percent or lower.
Understanding FHA Loan Requirements
The government agency called the Federal Housing Administration backs loans that provide options for people with suboptimal credit and not much money for a down payment. The tradeoffs are having to pay mortgage insurance the whole mortgage term, paying a slightly higher interest rate and likely having fewer approved housing options.
When it comes to credit score requirements, you could get an FHA loan with a credit score as low as 500, but that would mean putting 10 percent down. If you have a 580 credit score, which is the threshold some lenders set for the FHA program in general, than you just need to put down 3.5 percent. To make things easier, the FHA will let you use gifted money if you don't have a down payment saved in the bank.
Your credit score can determine the debt-to-income ratio the FHA will accept. The ceiling is usually 43 percent with manually underwritten loans, but it can be raised with a good credit score. The FHA will also consider the steadiness of your income when making the decision.
Looking at USDA Loan Requirements
If you're buying a house in a rural area that meets the location and property requirements the U.S. Department of Agriculture has set, there's a special mortgage program that may be available to you. It's unique in that it has income requirements that vary by region, and it offers more flexibility with its credit requirements.
Like with VA loans, the USDA program doesn't have a set minimum credit score. However, approval is easiest with a score of at least 640, since less creditworthy applicants have to go through a more stringent underwriting process. The credit analysis includes assessing your score along with factors like your credit history length as well as credit use and repayment patterns.
You'll also need to meet household income requirements in the area where the home's located, and the USDA usually sets a threshold of no more than 115 percent of the median income there. This means you'll need a low or moderate income. Further, you'll usually need a maximum debt-to-income ratio of just 41 percent. With this loan program, you could qualify with no down payment at all.
Deciding How to Proceed
If you can't meet the credit score requirements for conventional loan programs, then you can consider applying for an FHA loan, if you have a score of at least 500, or you could look into the USDA or VA programs that don't have a fixed requirement. You can also try these tips to boost your chances of mortgage approval, and they work regardless of whether you have poor or excellent credit:
- Have a lot of cash on hand: Having a hefty down payment can help in different ways. First, it can help you qualify with a lower credit score for certain loan programs. Further, it can help you avoid private mortgage insurance and cut down on interest paid over time. Beyond a down payment, having many months' worth of mortgage payments in the bank can make lenders feel more confident about your ability to pay.
- Show stable employment: All lenders look for a steady income, often over a two-year period. Be prepared to show this with tax returns, pay stubs and bank statements. You can consider boosting your income as well to lower your debt-to-income ratio and prove you can afford your mortgage payment.
- Get rid of debt: If you have a lower credit score, having a high level of debt can make approval even harder. If you have the ability, start paying off other debt long before you need a mortgage. This will make it easier to afford your mortgage payments, as it lowers your debt-to-income ratio.
- Increase your credit score: Take steps beforehand to fix credit issues and boost your score. For example, pay everything on time and extra if possible, avoid new credit applications, fix credit report errors and keep an eye on your score during the process.
In situations where you just can't get a mortgage, you can consider alternative house-financing options. For example, you could try applying with a co-signer or exploring seller financing and rent-to-own options. You might also borrow from other sources such as retirement accounts or relatives.
Applying for a Mortgage
When you're ready to buy a house with a home loan, you can proceed with seeking a lender who can walk you through the pre-approval process and give you an idea of whether you would qualify. You can start this process online if you'd rather not call or visit a lender. You'll need to know some key details, including your income, other debts and the desired loan amount. Your lender can estimate your approval amount using these details and your credit history.
When you move forward to the real application, you'll have to fill out a lot of paperwork, often electronically, and submit plenty of documentation to show you meet the lender's requirements. For example, you'll document your income through sources like pay stubs, W-2 forms, tax returns and profit-and-loss statements (for business owners). Lenders also like to see bank statements showing your down payment and reserve funds and may request more documents if they have questions about your financial situation.
You can expect to stay in communication with your lender during the underwriting process to answer questions and submit more documents as needed. When you're ready to close, you'll sign some final documents and get the keys to your new home.
- Quicken Loans: What Credit Score Do You Need to Buy a House in 2020?
- The Motley Fool: Average Credit Score in America: 2020 Report
- Forbes: How to Get a Mortgage With Bad Credit
- CNBC: What Credit Score Is Required to Buy a House?
- Fannie Mae: B3-5.1-01, General Requirements for Credit Scores (08/05/2020)
- Bankrate: 5 Types of Mortgage Loans for Homebuyers
- U.S. Department of Veteran Affairs: VA Guaranteed Loan
- Rocket Mortgage: FHA Loans: Requirements, Loan Limits and Rates
- USDALoans.com: USDA Loan Eligibility
- Equifax: What Is a Credit Score?
- Mortgage Loan: 7 Alternatives to a Traditional Mortgage for Buying a Home
- NerdWallet: How to Apply for a Mortgage
- myFICO. “What's in my FICO® Scores?” Accessed May 12, 2020.
- Federal Reserve Bank of St. Louis. “Did Credit Scores Predict the Subprime Crisis?” Accessed May 12, 2020.
- Experian. “What Credit Score Do I Need to Get a Mortgage?” Accessed May 12, 2020.
- myFICO. “What is a Credit Score?” Accessed May 12, 2020.
- U.S. Department of Housing and Urban Development. “THE FEDERAL HOUSING ADMINISTRATION (FHA).” Accessed May 12, 2020.
- Universal Credit Services. “Tri-Merge Credit Reports.” Accessed May 12, 2020.
- Newcastle Loans. “How credit scores affect your mortgage rate and approval.” Accessed May 12, 2020.
- United States Federal Trade Commission. “Free Credit Reports.” Accessed May 12, 2020.
- Bank of America. “Get your FICO® Score for free in Online and Mobile Banking.” Accessed May 12, 2020.
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.