What Credit Score Is Needed for a Mortgage?

What Credit Score Is Needed for a Mortgage?

Requirements vary by the type of loan and particular lender, but generally you’ll need a score of at least 500.

What Credit Score Is Needed for a Mortgage?

The Good Brigade/Getty Images

Fact checked by Betsy Petrick

Your credit score is a major factor that lenders use to decide whether to approve you for a mortgage. This three-digit number represents your potential risk as a borrower, the likelihood you’ll pay a loan back on time. Mortgage credit score requirements vary depending on the lender and type of loan. In most cases, you’ll need a minimum score of 620 for a conventional loan and 500 for an FHA loan. Some government-backed loans have no specified minimum.

Key Takeaways

  • Your credit score plays a crucial role in getting approved for a mortgage, as well as the interest rates and other terms you may be offered.
  • Conventional mortgages usually have higher minimum credit score requirements of 620, while government-backed mortgages can be more flexible with credit score minimums of 500.
  • Mortgage lenders also consider other factors, such as your income, employment history, and debt-to-income ratio.
  • There are steps you can take to improve your credit score before applying for a mortgage to increase your odds of approval.

Understanding Credit Scores

A credit score is a way for prospective lenders to gauge the odds that you’d pay back your loan on time—or at all. Most credit scores range from 300 to 850. Your score is based on information in your credit reports, as compiled by the three major credit bureaus, Equifax, Experian, and TransUnion.

That information can include:

  • A list of your current and past credit accounts
  • How often you have applied for and opened new accounts
  • Your payment history on each of your accounts
  • The number of years you’ve had accounts open
  • The percentage of your available credit that you are currently using, known as your credit utilization ratio
  • Any negative marks, such as debt going to collections, bankruptcy, or foreclosure

Lenders use different scoring models for different purposes. FICO scores, the most widely used scoring models, are often categorized as follows:

  • Poor: Below 580 
  • Fair 580 to 669 
  • Good: 670 to 739 
  • Very good: 740 to 799 
  • Exceptional: 800 and up

As a general rule, the higher your score, the more likely you are to be approved for a loan, and the lower the interest rates you may be offered. Most lenders want to see at least a fair credit score. 

Credit Score Requirements for Mortgages

The minimum credit score you’ll need to get a mortgage can depend on the type of the loan:

Minimum Credit Score for Conventional Mortgages

A conventional mortgage is a loan made by a private lender and can be either conforming or nonconforming. Conforming loans meet the requirements set by Fannie Mae and Freddie Mac, two congressionally chartered companies that buy mortgages from lenders and often package them into mortgage-backed securities for sale to investors. To get a conforming loan, you must generally have a credit score of at least 620.

Lenders can set their own requirements for nonconforming loans, which may include include lower acceptable credit scores.

Credit Score Requirements for Government-Backed Mortgages

Government-backed mortgages, such as Federal Housing Administration (FHA) loans, often have more lenient credit requirements than conventional mortgages. FHA loans require a credit score of at least 500, along with a down payment of at least 10%. Applicants with a score of 580 or higher are eligible for 3.5% down payments.

Veterans Affairs (VA) loans don’t have a minimum credit score requirement, but the lenders who issue them may have their own requirements. U.S. Department of Agriculture (USDA) loans also don’t specify a minimum credit score requirement. However, borrowers may need to provide more documentation if their credit score is below 640.

Improving Your Credit Score for a Mortgage

Before applying for any kind of mortgage, it can be helpful to know your credit score. You can obtain your credit score free of charge from many banks and credit card companies, as well as from online sources. If find that your score isn’t up to par, there are some steps you can take:

  • Review your credit reports. Determining what may be dragging down your credit score is an important step to improving it. By law you’re entitled to a free credit report at least once a year from each of the three major credit bureaus. The official website for obtaining all three is AnnualCreditReport.com. Look over each one to see if there are any inaccuracies that could be hurting your score, such as unpaid bills that you know you paid. You have a right to dispute any errors you find, and the credit bureau is required to investigate.
  • Pay all your credit bills on time. This is the single most important factor that the scoring models use in assigning you a credit score.
  • Work on paying down debt. Lowering the total amount you owe can improve both your credit utilization ratio and your debt-to-income ratio, another factor that mortgage lenders consider, as explained below.
  • Hold off applying for other new credit. Applications for other loans or credit cards can trigger a hard credit inquiry, which can temporarily lower your credit score. Plus, too many loan applications could have lenders wondering if you rely too much on credit, impairing your chances of approval. 

Other Factors Considered by Mortgage Lenders

Your credit score isn’t the only important factor that mortgage lenders use when assessing your loan application. Others include:

  • Income. Lenders want to know that potential borrowers will have enough money coming in to make their monthly mortgage payments. If you’re applying for a joint loan with another person, the lender may consider your two incomes. Your income can affect both your eligibility for a mortgage and how large a loan a lender may be willing to offer you. Your credit reports don’t include income information, so it isn’t factored into your credit score.
  • Employment history. In most cases lenders will ask for your employment information, going back about two years.
  • Debt-to-income ratio. Your debt-to-income (DTI) ratio, mentioned above, is the percentage of your income that’s going toward your current debt payments. You can compute your DTI by dividing your monthly debt obligations by your monthly gross income. Lenders may consider DTIs over a certain percentage to be disqualifying. According to the Consumer Financial Protection Bureau, lenders generally like to see a DTI of 36% or less (including mortgage payments), although some will accept a DTI of 43% or higher.

What Factors Do Mortgage Lenders Consider Besides Credit Scores?

Other factors lenders consider when assessing an applicant include their income, employment history, and debt-to-income ratio (DTI). Lenders also use a calculation known as a loan-to-value ratio (LTV), which looks at how much you want to borrow relative to the value of the home. In general, the larger the down payment you’re prepared to make, the more favorably lenders will view you, as that lessens their risk.

Can a Higher Credit Score Lead to Better Mortgage Terms and Interest Rates?

A higher credit score can improve your chances of securing a better interest rate and terms for your mortgage. However, even if you have a relatively high score, it is still worth shopping around because lenders can vary in what they may offer you.

What Are the Advantages and Disadvantages of Government-Backed Mortgages?

Government-backed mortgages like FHA and VA loans have more flexible credit and income requirements compared with conventional loans. These loans can offer competitive rates and lower down payments. One of the downsides is that borrowers may need to meet other requirements, such as serving in the military or having an income under a certain level.

The Bottom Line

Minimum credit score requirements for mortgages can depend on the type of loan and a particular lender’s criteria. If your credit score doesn’t meet the minimum, or if it’s teetering on the edge, consider taking some time to improve it before you apply.

Read the original article on Investopedia.