What credit score do you need for a mortgage?

When house shopping, knowing your credit score for a mortgage is key. Since the minimum score requirement varies amongst lenders and mortgage types, aiming to improve to your best score is the best method

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Want to be sure you have the credit score needed for a mortgage? Learn what lenders are looking for to get approved to buy a house.  (iStock)

If you’re trying to get a mortgage, your credit score matters. Mortgage lenders use credit scores — as well as other information — to assess your likelihood of repaying a loan on time.

Because credit scores are so important, lenders set minimum scores you must have in order to qualify for a mortgage with them. Minimum credit score varies by lender and mortgage type, but generally, a higher score means better loan terms for you.

Let’s look at which loan types are best for different credit scores.

Credit score needed to buy a house

Mortgage lending is risky, and lenders want a way to quantify that risk. They use your three-digit credit score to gauge the risk of loaning you money since your credit score helps predict your likelihood of paying back a loan on time. Lenders also consider other data, such as your income, employment, debts and assets to decide whether to offer you a loan.

For those reasons, if you will be a first-time homebuyer, refinancing your home, or have a lower credit score, you may want to boost your credit score first. To begin, check your credit report for inaccuracies or signs of fraud. You can access your report for free annually through AnnualCreditReport.com. Contact the specific credit bureau — Equifax, Experian and Transunion — to remedy or dispute errors on your report. 

After boosting your credit score (see other helpful strategies below), you might be ready to explore different lenders and loan types and their different borrower requirements, loan terms and minimum credit scores. Here are the requirements for some of the most common types of mortgages.

Conventional loan

Minimum credit score: 620

A conventional loan is a mortgage that isn’t backed by a federal agency. Most mortgage lenders offer conventional loans, and many lenders sell these loans to Fannie Mae or Freddie Mac — two government-sponsored enterprises. Also, conventional loans are the most common mortgage type and give lenders more flexibility than government-backed mortgages and their complex guidelines. Conventional loans can have either fixed or adjustable rates and terms ranging from 10 to 30 years.

To qualify, most lenders will want you to have a 36% debt-to-income (DTI) ratio, meaning your total monthly debts would be no more than 36% of your monthly gross income. Or, at the very least, aim for a DTI of 43%.

You can get a conventional loan with a down payment as low as 3% of the home’s purchase price, so this type of loan makes sense if you don’t have enough for a traditional down payment.

 However, if your down payment is less than 20%, you’re required to pay for private mortgage insurance (PMI), which is an insurance policy designed to protect the lender if you stop making payments. You can ask your servicer to cancel PMI once the principal balance of your mortgage falls below 80% of the original value of your home.

With Credible, you can easily compare mortgage rates from various lenders to find the right one for you.

FHA loan

Minimum credit score (10% down): 500

Minimum credit score (3.5% down): 580

FHA loans are backed by the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD). The FHA incentivizes lenders to make mortgage loans available to borrowers who might not otherwise qualify by guaranteeing the federal government will repay the mortgage if the borrower stops making payments. This makes an FHA loan a good option if you have a lower credit score.

FHA loans come in 15- or 30-year terms with fixed interest rates. Unlike conventional mortgages, which only require PMI for borrowers with less than 20% down, all FHA borrowers must pay an up-front mortgage insurance premium (MIP) and an annual MIP, as long as the loan is outstanding.

To get an FHA loan, there aren’t any set income requirements. However, the home that you are seeking an FHA loan for must be your primary residence.

VA loan 

Minimum credit score: Varies by lender, no industry-set requirement

VA loans are fixed-rate mortgages backed by the U.S. Department of Veterans Affairs (VA) that come in 10-, 15-, 20-, or 30-year terms. The VA guarantees loans made by VA-approved lenders to qualifying veterans or service members of the U.S. armed forces or their spouses. This type of loan is a great option especially if you don’t have the best credit and don’t have enough money saved for a down payment.

However, your VA loan eligibility is based on meeting the minimum active-duty service requirements that must be proven with a Certificate of Eligibility (COE). If you’re a service member, you must have served for 90 continuous days. If you’re a veteran, National Guard member or Reserve member, it is based on exactly when you served. For instance, if you’re a post-Vietnam War period veteran, you must have served 181 continuous days if not discharged or less than 181 days if you were discharged for a service-connected disability.

Most VA loans don’t require a down payment or monthly mortgage insurance premiums. However, they do require a one-time VA funding fee that ranges from 1.4% to 3.6% of the loan amount. 

USDA loan

Minimum credit score: 640

All USDA mortgages have fixed interest rates and 30-year repayment terms. The U.S. Department of Agriculture guarantees loans for borrowers buying homes in certain rural areas. USDA loans don’t require a minimum down payment, but you have to meet the USDA’s income eligibility limits to fall into either their Very Low Income, Low Income or Moderate Income programs, which vary by location and household information. These factors include:

  • Number of people in your household
  • Number of people who are 18 years old, disabled, and/or full-time students
  • Whether the applicant or co-applicant is 62 years or older

For instance, for Single Family Housing Services, if you live in the Clarke County area of Alabama with another person who is under 18 years old and an annual income of $49,000, you may qualify for the Low Income program.

USDA-approved lenders must pay an up-front guarantee fee of up to 3.5% of the purchase price to the USDA. That fee can be passed on to borrowers and financed into the home loan. If the home you want to buy is within an eligible rural area (defined by the USDA) and you meet the other requirements, this could be a great loan option for you.

You can also contact an Approved Program Lender in your area to learn more about eligibility requirements. 

Jumbo loan 

Minimum credit score: 660

Jumbo loans are conventional mortgages that don’t conform to loan limits set forth by Fannie Mae or Freddie Mac. They’re often one of the few financing options for buyers of luxury properties that are significantly more expensive than other homes in the area.

Jumbo loans can have 15-, 20-, or 30-year repayment terms, and loans can have fixed or variable interest rates.

The requirements and terms of jumbo loans vary by lender, but due to the large borrowing amount, many lenders require down payments of at least 20%, ask for higher closing costs and have stricter underwriting requirements. For instance, some lenders may want the following:

  • FICO score as high as a 720
  • Proof of liquid assets, savings, or other cash reserves
  • "Second opinion" appraisals to verify the home’s market value

Can you get a home loan with bad credit?

No credit score will absolutely prevent you from getting a mortgage, but bad credit — typically defined as a FICO Score below 670 — does make it harder to find a lender willing to underwrite your loan.

Lenders use your credit score to decide how much interest to charge, so with a lower credit score, lenders may charge you a higher interest rate, which will cost you more over the life of the loan.

Still, many organizations and mortgage programs are designed to help people with past financial troubles buy a home. You may have to make a larger down payment or jump through more hoops to demonstrate that you’re capable of repaying the loan. Shopping around and comparing rates is essential when searching for a mortgage with bad credit.

Credible allows you to compare rates on home loans from various lenders at once.

What else do mortgage lenders consider?

Your credit score isn’t the only factor lenders consider when reviewing your loan application. Here are some of the other factors lenders use when deciding whether to give you a mortgage.

  • Debt-to-income ratio — Your debt-to-income (DTI) ratio is the amount of debt payments you make each month (including your mortgage payments) relative to your gross monthly income. For example, if your mortgage payments, car loan and credit card payments add up to $1,800 per month and you have a $6,000 monthly income, your debt-to-income ratio would be $1,800/$6,000, or 30%. Most conventional mortgages require a DTI ratio no greater than 36%. However, you may be approved with a DTI up to 45% if you meet other requirements.
  • Employment history — When you apply for a mortgage, lenders will ask for proof of employment — typically two years’ worth of W-2s and tax returns, as well as your two most recent pay stubs. Lenders prefer to work with people who have stable employment and consistent income.
  • Down payment — Putting money down to buy a home gives you immediate equity in the home and helps to ensure the lender recoups their loss if you stop making payments and they need to foreclose on the home. Most loans — other than VA and USDA loans — require a down payment of at least 3%, although a higher down payment could help you qualify for a lower interest rate or make up for other less-than-ideal aspects of your mortgage application.
  • The home’s value and condition — Lenders want to ensure the home collateralizing the loan is in good condition and worth what you’re paying for it. Typically, they’ll require an appraisal to determine the home’s value and may also require a home inspection to ensure there aren’t any unknown issues with the property.

How is your credit score calculated?

Most talk of credit scores makes it sound as if you have only one score. In fact, you have several credit scores, and they may be used by different lenders and for different purposes.

The three national credit bureaus — Experian, Equifax and TransUnion — collect information from banks, credit unions, lenders and public records to formulate your credit score. The most common and well-known scoring model is the FICO Score, which is based on the following five factors:

  • Payment history (35%) — A history of late payments will drag your score down, as will negative information from bankruptcies, foreclosures, repossessions or accounts referred to collections.
  • How much you owe (30%) — Your credit utilization ratio is the amount of revolving credit you’re using compared to your total available credit. For example, if you have one credit card with a $2,000 balance and a $4,000 credit limit, your credit utilization ratio is 50%. Credit scoring models view using a larger percentage of your available credit as risky behavior, so high balances and maxed-out credit cards will negatively impact your score.
  • Length of credit history (15%) — This factor considers the age of your oldest account, newest account and the average age of all your credit accounts. In general, the longer you’ve been using credit responsibly, the higher your score will be.
  • Types of accounts (10%) — Credit scoring models favor people who use a mix of credit cards, installment loans, mortgages and other types of credit.
  • Recent credit history (10%) — Lenders view applying for and opening several new credit accounts within a short period as a sign of financial trouble and it’ll negatively impact your score.

How to improve your credit score

The specific steps you need to take to improve your credit score depend on your unique credit profile and financial situation. However, these general steps apply to anyone.

  1. Pay your bills on time. Make sure you pay credit cards, loans, rent payments, utilities and your mobile contract on time each month. Even accounts that aren’t normally reported to the credit bureaus can negatively impact your score if they’re referred to a collection agency.
  2. Apply for new credit only if you need it. When you apply for a new credit card, the lender will check your credit, resulting in a "hard inquiry" on your credit report. Hard inquiries can cause your credit score to drop by a few points, although the effect is usually short-lived. Getting new credit also lowers the average age of your credit accounts, so apply for new accounts only when necessary.
  3. Don’t close old accounts. Closing unused credit card accounts lowers your total available credit, increases your overall credit utilization ratio and lowers the average age of your credit accounts. So it’s best to keep those accounts open, even if you aren’t using them. That said, if keeping an unnecessary account open will tempt you to overspend, it may be better to close it and take the temporary hit to your credit.
  4. Monitor your credit. Get in the habit of checking your credit report regularly. Look for inaccurate information or signs of fraud, and dispute any errors with the applicable credit bureau right away to ensure fraud and mistakes don’t drag down your score.

Ready to shop around for a mortgage? Check out Credible to compare rates from different lenders.