The lender and the type of loan you choose determine the credit score you need for a mortgage.
Mortgage lenders consider your credit score a measure of your ability to responsibly manage debt. The higher your credit score, the better your chances of being approved for a home loan, and vice versa. Having good credit can also make it possible to qualify for a mortgage with more competitive terms, like a lower interest rate.
The minimum credit score you need to buy a home depends on the type of mortgage you plan to borrow. A conventional mortgage usually requires a credit score of at least 620, but it may be possible to qualify for a government-backed loan with a score as low as 500.
However, just because you’ve reached the minimum credit score to borrow a mortgage doesn’t necessarily mean you’ll meet all the other eligibility requirements. And generally, having a higher credit score will help you qualify for a home loan with a lower mortgage rate, so it’s important to work on improving your credit score well in advance of buying a home.
Minimum Credit Score Requirements by Loan Type
Mortgage credit score requirements vary based on a number of factors, including the loan type, amount and lender.
Conventional conforming loans, which are not backed by a government agency, require a minimum credit score of 620 in order to meet the criteria to be purchased by Fannie Mae and Freddie Mac. Jumbo loans that exceed the conforming loan limits have stricter eligibility requirements for credit score, down payment and income.
Meanwhile, government-backed mortgages are insured by a federal agency, such as the Federal Housing Administration, the Department of Agriculture or the Department of Veterans Affairs. This government guarantee protects the lender if you default on your mortgage, which translates to less stringent credit score requirements.
You can see minimum credit score criteria by mortgage type in the table below.
|MINIMUM CREDIT SCORE||WHO CAN BENEFIT|
|Conventional loan||620 for fixed-rate loans; 640 for adjustable-rate mortgages; lenders may have stricter requirements.||Well-qualified buyers seeking a traditional mortgage.|
|FHA loan||580 with a 3.5% down payment; 500 with a 10% down payment.||Homebuyers with fair credit and small down payments.|
|USDA loan||No set minimum; borrowers with a score of 640 or higher may qualify for a streamlined credit analysis.||Qualified buyers purchasing homes in designated rural areas.|
|VA loan||No set minimum; lenders may require a score of at least 580.||Active-duty and retired military personnel who are buying or refinancing a home.|
|Jumbo loan||700, depending on the lender; higher loan amounts may require stronger credit scores.||Buyers borrowing a mortgage that exceeds the conforming loan limit.|
Why Credit Score Matters When Buying a Home
In general, having a higher credit score makes it possible to qualify for better loan repayment terms, such as a lower mortgage rate. This is true regardless of which type of mortgage you decide to borrow.
For conventional loans, your credit score directly correlates to the mortgage rate you pay through loan-level price adjustments. Borrowers with a FICO credit score above 780 and a down payment of at least 40% will see the lowest possible financing charges, while those with a score below 640 could see the highest rates available.
Even a small difference in your mortgage rate can translate to thousands of dollars in savings over the life of the loan. On a $250,000 30-year loan with a 6% mortgage rate, you can expect to pay $289,595 in interest charges over the duration of the loan. With a rate increase of just a 0.25 percentage point, you’d pay an extra $14,550 in interest by the time the loan is fully repaid.
A lower mortgage interest rate can also help you save money in your monthly budget. The monthly principal and interest payment on the same loan at 6% would be $1,499, compared with $1,539 at a 6.25% rate.
Other Eligibility Criteria for Getting a Mortgage
Your credit score is just one measure of your financial health, and it’s not the only factor mortgage lenders will consider when determining your eligibility for a home loan. Here are some additional criteria that affect your chances of mortgage approval:
- Debt-to-income ratio, which is your total monthly bills divided by your gross monthly income. Having a DTI ratio of 43% or higher may make it more difficult to qualify for a mortgage.
- Loan-to-value ratio, which is the loan amount divided by the house purchase price. If you have a higher down payment, your LTV ratio will be lower, and vice versa.
- Negative credit history, such as defaulted loans, foreclosure or bankruptcy. For example, you need to wait two years after bankruptcy to apply for an FHA loan.
- Liquid assets, such as savings and investment accounts. This is particularly important for jumbo loan borrowers who are buying multi-million-dollar homes.
- Profits and losses, if you own a business. This can help measure your likelihood of repaying a mortgage as a self-employed individual.
How to Prepare Your Credit Score for Buying a Home
If your credit score is holding your back from buying a home, you should start building better credit now. If you have bad credit, it could take months or a year to get your credit in shape to qualify for a mortgage. Here are a few steps to help improve your credit score before applying for a home loan.
1. Check Your Credit Score and Report
Before you can come up with a plan to boost your credit score, you’ll need to find out where you currently stand. Many banks and third-party financial apps let you check your FICO score for free without damaging your credit.
You should also get a copy of your credit report from all three credit bureaus – Equifax, Experian and TransUnion – on www.AnnualCreditReport.com. Your credit report provides an in-depth look into your financial history, including your outstanding debts, total accounts and on-time payment record. If you find errors on your credit report, dispute them with the bureau directly.
2. Find Areas for Improving Your Credit Score
With your credit report and scores in hand, look for areas where you can make improvements before you apply for a mortgage. Here are a few common credit issues and how to resolve them:
Poor on-time payment history: Enroll in automatic payments for credit cards, auto loans and other bills. Additionally, make sure any bills you pay each month (such as rent or buy now, pay later installments) are reported to the credit bureaus.
High credit utilization: Pay down your credit card balances. You can also request a credit line increase, but make sure not to rack up more debt just because your limit is higher.
Low age of credit: Keep older, well-established accounts open. If you have a credit card account that you never use, consider charging it once every few months and paying off the balance to keep it active.
3. Avoid Applying for New Credit While You Shop for a Home
Opening a new account, such as a credit card or auto loan, lowers your average age of credit and results in a hard credit inquiry that can lower your score by a few points. Importantly, applying for new credit after you’ve already been preapproved for a mortgage can pose big issues during the underwriting process.
Source: money.usnews.com ~ By Erika Giovanetti ~ Image: Canva Pro