What Credit Score is Needed for a Mortgage?
The minimum credit score needed for a mortgage is as low as 500. However, if you have a credit score lower than 640, you will find it difficult to get conventional loans from banks and online lenders, and you would need either a Federal Housing Administration (FHA)-, Veteran Affairs (VA)-, Fannie Mae and Freddie Mac-, or the United States Department of Agriculture (USDA) Rural Housing-backed loan.
The minimum FICO (Fair, Isaac and Company) credit scores typically required are as follows:
- FHA Loan – 500+ credit score (580+ is more likely)
- VA Loan – No minimum (some lenders require 580 – 620)
- USDA Loan – 640+ credit score
- Conventional Loan – 640+ credit score
What is the Credit Score Needed for a Mortgage?
If you are looking to get a mortgage and you’re concerned about what credit score is needed for a mortgage, the first thing you need to do is to check your FICO credit score. The FICO scoring model is the credit scoring model used by lenders in the U.S., and it is basically a representation of your repayment habits when you borrow money. The credit score you need will vary based on the home you’re looking to buy and how much down payment you can make. While credit score is one of the most important factors that lenders use in deciding whether to offer you a mortgage, there are other factors such as your debt-to-income ratio, your savings (high savings is a plus), the amount of down payment you can make, and your employment history (long employment history with your current employer is a plus) that are also considered. Hence, you can also qualify for a mortgage even with a low credit score if such factors are favorable. However, for the purpose of this article, we have focused on discussing the credit score needed to get a home loan in general.
Mortgaging with an Excellent Credit Score
A FICO credit score of 760 and above is generally considered golden. People with such high scores do not just qualify for a mortgage from most lenders, they also get offered the best mortgage deals. For a typical 30-year mortgage, a 0.25% interest rate difference can lead to huge savings. From a score of 760, any 20-point decrease may often result in a small increase in rates or a less favorable deal, but a credit score of 720 to 759 is still considered very good by most lenders and you would still get a good deal if you fall within that range. A score of 680 to 719 is still considered good, especially scores above 700. Between 680 and 720, you still have the credit score needed for a mortgage.
Mortgaging with a Good Credit Score
A FICO score of between 650 and 679 is also considered fair and you would have no issue finding a lender that is willing to give you a mortgage given the competition in the lending space; however, the interest rate may not be as favorable as rates for those with a higher FICO score. The real trouble starts for those with a credit score that is close to 640 or below. At that point, it would be difficult finding a bank or online lender that would offer you a conventional loan. However, there is no need to panic yet if you have such a credit score. There are other mortgages you may qualify for outside the conventional mortgage.
Mortgage Options for Fair Credit Scores
The USDA Rural Housing-backed loan is one such option that you can turn to if you have a credit score close to 640 and you are finding it difficult to obtain a conventional loan. The minimum credit score needed for a mortgage by USDA Rural Housing scheme is 640, so you won’t have any issue with them. You can also be approved for a USDA Housing-backed loan without any down payment.
Mortgage Options for Poor Credit Scores
If your credit score is below 640, a Fannie Mae and Freddie Mac-backed loan is the best place to turn to because the credit score needed for a mortgage backed by Fannie Mae and Freddie Mac is just 620. A 3.5% down payment is also generally sufficient. However, if you have a credit score lower than 620, your best and last bet would be to apply for an FHA-backed loan. For FHA-backed loans, the minimum credit score needed for a mortgage backed by the FHA is 500, but it’s difficult to get approval if your score is below 580. The majority of approved FHA loans are for those with scores between 600 and 700. A 3.5% down payment is generally sufficient for those with credit scores of 580 and above for FHA-backed loans; however, those with a credit score of 500 – 570 would need a 10% down payment. Although the minimum credit score needed for a mortgage backed by the FHA is technically 500, it is difficult for people with credit score below 570 to gain approval even with a 10% down payment. If you’re a veteran, you may be able to get VA-backed loans regardless of your credit score and without any down payment. The VA doesn’t set any minimum but they don’t make the loan directly. Lenders who offer VA-backed loans may demand a credit score of between 580 and 620.
If you have a low score, you can easily use online tools to check, track, and build your credit score so you can get the best mortgage deal possible.