Though it’s possible to get a mortgage with a lower credit score, you’ll want a score of at least 740 to qualify for the lowest interest rates. Surprisingly, though, credit scores of 640 are fine with many lenders. Of course, the real answer to the credit score question is the highest possible one you can build for yourself.Click here for today's mortgage rates.
There are plenty of bad credit home loans available. And there are some lenders that specialize in mortgages for those with excellent credit. Most of us are in between those two extremes.
But not all home buyers can afford to wait to become homeowners until we’ve got perfect credit.
For most, it’s probably better to buy a home with a less-than-sparkling score. And then use the first years as homeowners to bring your score up so you can qualify for the best mortgage when you later move or refinance.
In this article, we’ll be exploring:
- How your credit score affects your mortgage rate
- Your score’s effect on your loan options
- Minimum credit scores by type of mortgage
- Bad credit home loans
- What else lenders consider when determining your mortgage rate
- 6 tips to improve your credit
So read on for all you need to know about your score and mortgage.
How Your Credit Score Affects Your Mortgage Rate
Your credit score tells lenders that you’re a responsible borrower with a proven record for managing debt. The way in which you’ve managed your debts in the past is the best indicator of how you’re likely to handle your new mortgage debt.
So lenders will penalize you with a higher rate if you have a low credit score because, statistically, they have worse chances of getting their money back. So you have to pay more to cover the extra risk of your causing them losses.
Conversely, you stand to be offered a lower rate if your score is higher because lenders believe the risk of your defaulting is lower.
FICO, the company behind the most widely used credit scoring technologies, has a calculator on its website that shows you the impact your score is likely to have on your mortgage rate and costs.
Take — for example — a $200,000, 30-year, fixed-rate mortgage. These numbers are based on nationwide averages in October 2020. Rates and costs are likely to have changed by the time you read this. But here’s what we found:
|FICO score||APR %||Monthly payment||Total interest payable over 30 years|
The difference your score could make to the total amount of interest you pay over a 30-year mortgage is more than $62,000, and it will impact the size of your monthly payment.
You’ll see FICO has used score ranges (760-850, 700-759 and so on) as the basis of its calculations. Lenders do the same in real life, though the tiers might vary somewhat from lender to lender.
That makes it well worth the effort to get your score as high as possible in the months leading up to a mortgage application and home buying.
For example, suppose your score is 638. On that $200,000 loan from our example above, just bringing it up two points to 640 could save you more than $22,000 over the life of the loan.
So always do what you can to improve creditworthiness before you apply for any credit. Better yet, make building it over the long term a real priority in your life.
We’ll give you some tips that could help you with both a boost and that long-term goal below.Ready to shop for your dream home? Start here.
Loan Options By Credit Score
Let’s look at the mortgage choices your personal credit score gives you:
- 300-499: It’s highly unlikely any mainstream lender will loan to you. Take great care if you consider alternatives (seller financing, lease-purchase, contract-for-deed and so on). These programs lack consumer protections and often end up harming the borrower.
- 500-579: FHA loans may be available to you but only if you have a down payment of at least 10% of the purchase price.
- 580-619: FHA loans are available with just a 3.5% down payment.
- 620-699: You’re eligible for most mortgages including those backed by a government agency (FHA, VA and USDA loans) and conventional mortgages (both conforming loans from Fannie Mae and Freddie Mac or private loans). Only jumbo loans are probably beyond you.
- 700-739: You probably qualify for a jumbo loan along with all the other mortgage loan types listed above.
- 740-850: You’ll have your pick of mortgage types and low interest rates. Even if your down payment is low, you’ll probably qualify for a lower mortgage insurance payment.
But remember the golden rule: The higher your credit score the lower your mortgage rate should be. A lower credit score will mean higher interest rates. So it’s always worth continually improving your credit score until it’s nearly perfect.
Minimum credit score by loan type
The minimum credit score will vary by loan type.
What’s the minimum credit score for conventional loans?
Most conventional loans — including “conforming loans” that meet Fannie or Freddie rules — will require a minimum credit score of 620.
What’s the minimum credit score for FHA loans?
The credit score threshold to qualify for an FHA loan is 500 if you can put 10% down, and 580 with a down payment of 3.5%. The minimum credit score is determined by the Federal Housing Administration.
What’s the minimum credit score for VA loans?
The Department of Veterans Affairs has no official minimum credit score to qualify for a VA loan but most lenders will require that you have a credit score of at least 620.
What’s the minimum credit score for USDA loans?
The U.S. Department of Agriculture does not specify an official minimum to qualify for a USDA loan, but most lenders will require a credit score of 640 or better.
What’s the minimum credit score for Jumbo Loans
To qualify for a jumbo loan, you probably need a credit score of 700, though some lenders may issue one to borrowers with a credit score of 680.
Important Note About Credit Score Minimums By Loan Type
Programs usually set floors but individual mortgage companies can and do apply their own standards for credit score minimum types. Don’t be surprised if minimum credit scores for the same type of loan vary by lender.
This is particularly evident when it comes to VA loans. The VA says, “There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile.” So the VA doesn’t set a minimum. But lenders definitely do.
If you’re turned down for a loan even though your score is at or above the minimum set by a program, simply shop around for a more sympathetic lender.Click here to speak with a mortgage specialist.
Can you get a home loan with bad credit?
If you have a credit score below 580, you have two options available to you.
Either scrape together a 10% down payment and go with an FHA mortgage. Or opt for one of those “alternative” mortgages we mentioned earlier.
We can’t recommend the second route. Too often, unregulated, predatory lenders exploit vulnerable borrowers. In most circumstances, we’d advise waiting until you’ve improved your score. With a higher credit score, you can get a proper mortgage from a respectable mainstream lender.
What else do mortgage lenders consider?
An exceptionally high credit score may earn you some flexibility with the other criteria lenders use when deciding whether to lend to you and at what mortgage rate. But those other criteria are always important and often decisive.
In addition to credit score, lenders look at:
- Income. We’ve already said that an overriding priority of lenders is ensuring that you can afford to repay the loan amount and your income is an important factor in that calculation.
- Debt-to-income ratio (DTI). If too big a proportion of your income is eaten up each month by existing obligations (including debts, child support or alimony), that will affect your ability to afford your payments.
- Down payment (aka loan-to-value ratio or LTV). The higher your down payment, the less your lender stands to lose if your loan defaults.
- Savings. Your loan is less likely to default if you have significant savings.
- Employment history. Lenders want to know you’re a reliable and consistent earner. Your ability to make payments rests on this.
Lenders have a legal obligation to satisfy themselves that, overall, you represent a good risk as a borrower. Many lenders take a holistic view of your finances when determining eligibility. So, for example, if you don’t have much debt, they may be less picky about your savings or income.Ready to start your home buying journey? Start here.
6 Tips To Improve Your Credit
It can take years to change a fair or poor score into an excellent one. But you can still improve it over just a few months — sometimes, even less, which can mean a lower interest rate.
Here are ways that can help your credit score over the short and long terms:
- Check your credit report and correct errors. You’re legally entitled to a free credit report each year. Get yours annually only from annualcreditreport.com, which is run by the Big-3 credit bureaus (Equifax, Experian and TransUnion).
- Pay all your bills on time, every time. Thirty-five percent of your score is based on your payment history, according to FICO. If you owe money, get current and stay that way.
- Keep your credit card balances below 30% of the credit limits. Your credit utilization ratio, the balances on your credit cards, account for up to 30% of your score.
- Don’t open new accounts unless you must. Every application for new credit gives your score a small and temporary hit so you don’t want to apply for any in the months leading up to major borrowing, such as a mortgage.
- Don’t open or close accounts unless it’s necessary. Closing accounts lowers the average age of all your accounts. And that average age is part of the length of your credit history, which accounts for 15% of your credit score.
- Actively manage your score. Some card issuers and others offer free score-monitoring services. They’re not all 100% reliable but they should quickly warn you of any issues you’re having.
Having poor or fair credit needn’t be something that dogs you through your whole life. Seize the initiative and pay less for all your borrowing in the future.Click here for today's mortgage rates.