Credit Score Requirements for a Mortgage 2024
The minimum credit score required to get a mortgage varies depending on the lender and the type of mortgage loan you’re applying for.
Your credit score plays a major role in determining your eligibility and the interest rate you’ll receive, so understanding these requirements is crucial for homebuyers.
This article takes an in-depth look into the credit score needed to buy a house for each mortgage loan type.
Can You Get A Home Loan With Bad Credit?
Yes, it is possible to get a home loan with bad credit, especially if you apply for an FHA loan. FHA loans are more lenient with credit requirements. Here’s what you need to know:
- Credit Score 500-579: Requires at least a 10% down payment.
- Credit Score 580 and above: Allows for just a 3.5% down payment.
- Current Lender Requirements: Due to economic shifts, many lenders now set a higher minimum of 580, even for FHA loans, and may require compensating factors for scores between 580-620.
Minimum Credit Score Requirement by Loan Type
Different mortgage types have specific credit score requirements, impacting both eligibility and the terms you can secure. Here’s a closer look at the requirements for each type of loan:
FHA Loans
FHA loans are designed to make homeownership more accessible, especially for those with lower credit scores.
- Minimum Credit Score: 580+ for a 3.5% down payment; 500-579 requires a 10% down payment.
- Down Payment Requirement: 3.5% to 10%, depending on your credit score.
- Additional Notes: FHA loans typically require mortgage insurance, adding to the monthly payment, but they are popular for first-time homebuyers because of the lower credit threshold.
VA Loans
VA loans are available to eligible veterans, active-duty service members, and certain surviving spouses.
- Minimum Credit Score: Generally 580-620, though this can vary by lender.
- Down Payment Requirement: 0% down payment, making it easier for veterans to purchase a home without a large upfront cost.
- Additional Notes: The Department of Veterans Affairs (VA) doesn’t set a minimum credit score requirement, but individual lenders often set their own standards. VA loans also do not require mortgage insurance.
USDA Loans
USDA loans are aimed at borrowers with low to moderate incomes who plan to buy a home in rural or suburban areas.
- Minimum Credit Score: 620 is typically required.
- Down Payment Requirement: No down payment is needed, offering 100% financing.
- Additional Notes: These loans have income limits; borrowers’ income must not exceed 115% of the area median income (AMI). Properties must be located in USDA-eligible areas.
Conventional Loans
Conventional loans are offered by private lenders and are not backed by the government.
- Minimum Credit Score: 620 is the standard requirement.
- Down Payment Requirement: Generally between 5% to 20%.
- Additional Notes: If the down payment is less than 20%, private mortgage insurance (PMI) is required, which adds to the monthly cost. Borrowers with higher credit scores can access better rates and terms.
HomeReady/Home Possible Loans
These programs are designed for low-income, first-time homebuyers.
- Minimum Credit Score: 620 is required to qualify.
- Down Payment Requirement: 3% down payment, making it easier for buyers with limited savings.
- Additional Notes: Borrowers’ income must be below 100% of the area median income (AMI), making these programs ideal for those in underserved areas.
Conventional 97 Loans
A Conventional 97 loan offers an affordable option for homebuyers needing minimal down payment.
- Minimum Credit Score: Requires a 680 credit score.
- Down Payment Requirement: 3%, which makes it a good option for buyers who have solid credit but limited savings.
- Additional Notes: No income limits apply, making this an accessible option for buyers across various income levels.
Jumbo Loans
Jumbo loans are for buyers needing a mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac.
- Minimum Credit Score: Generally 700 or higher.
- Down Payment Requirement: Ranges from 10% to 20%.
- Additional Notes: These loans come with higher risk for lenders, so they typically require a higher credit score and down payment. They are used for luxury homes or properties in high-cost areas where the loan amount exceeds standard limits.
Compensating Factors for Poor Credit
If your credit score is on the lower side, lenders may still approve your loan if you can offer compensating factors. These factors help offset the risk of lending to someone with less-than-perfect credit. Here are some examples:
| Compensating Factors | Impact on Loan Approval |
|---|---|
| Limited Payment Shock | Lenders are more comfortable if your new mortgage payment isn’t significantly higher than your current housing payment. |
| Stable Employment | 5+ years with the same employer or in the same industry shows stability. |
| High Income | A higher income relative to your debts can offset a lower credit score. |
| Large Down Payment | A 20% or higher down payment can make up for poor credit. |
| Residual Income | Extra cash left after monthly expenses can indicate a lower risk of default. |
| Low Debt-to-Income Ratio | A DTI ratio below 36% suggests you can manage monthly payments comfortably. |
How Your Credit Score is Calculated
Your credit score is determined by several factors, each impacting your score differently. Understanding these factors can help you identify areas to improve before applying for a mortgage.
| Credit Factor | Impact on Score | Description |
|---|---|---|
| Payment History | 35% | Reflects your history of on-time payments and any late or missed payments. |
| Credit Utilization | 30% | The percentage of available credit you are using. Aim for less than 25%. |
| Length of Credit History | 15% | The average age of your credit accounts—longer is better. |
| Types of Credit | 10% | A mix of credit types (credit cards, auto loans, mortgages) can boost your score. |
| New Credit Inquiries | 10% | Multiple hard inquiries can lower your score temporarily. |
What Lenders Look at Besides Your Credit
Lenders don’t just look at your credit score; they assess your entire financial profile. Negative factors like missed payments or collection accounts can result in a loan denial, even if your credit score is acceptable. Here’s what else they consider:
- Debt-to-Income Ratio (DTI): Generally, lenders prefer a DTI below 43%, but a ratio under 36% is ideal.
- Savings and Assets: Having reserves shows you can cover mortgage payments if unexpected expenses arise.
- Employment Stability: Lenders favor borrowers who have been in the same job or field for several years.
| Credit and Debt Guidelines | Expectations |
|---|---|
| No more than one late payment in the last 12 months | Shows responsible payment behavior |
| No recent mortgage late payments | Indicates ability to manage housing costs |
| 36-month waiting period after bankruptcy or foreclosure | Ensures time to rebuild credit |
| Limited unpaid debt in collections | Reduces perceived risk |
How Your Credit Score Affects Your Mortgage Rate
Your credit score directly influences the interest rate and loan terms you’ll receive. Higher scores can save you thousands of dollars over the life of your mortgage, while lower scores can increase costs.
| Credit Score Range | Impact on Interest Rate |
|---|---|
| 579 and lower | Rates can be up to 2% higher than the best available rates. |
| 580-619 | Expect rates up to 1% higher than average. |
| 620-679 | Rates are slightly higher, about 0.5% more than top rates. |
| 680-739 | Generally competitive rates, with minor adjustments. |
| 740 and higher | Qualifies for the best rates available. |
Tips to Improve Your Credit Score Before Applying
If your score needs a boost before applying for a mortgage, here are some actionable tips:
- Check Your Credit for Errors: Get your free reports from www.annualcreditreport.com. Dispute any inaccuracies.
- Pay Down Credit Card Balances: Lowering your credit utilization ratio can significantly boost your score. Aim for using less than 30% of your available credit.
- Pay Your Bills on Time: Payment history makes up 35% of your credit score. Set up automatic payments if needed to avoid missing deadlines.
- Negotiate Pay-for-Delete Agreements: If you have collections on your report, try negotiating a settlement where the creditor removes the negative entry once paid.
- Avoid New Credit Inquiries: Hard pulls can drop your score temporarily, so avoid applying for new credit cards or loans before applying for a mortgage.
The Bottom Line
Understanding the credit score requirements for various mortgage types can help you prepare for the homebuying process. While a higher score will open up more options and better rates, there are still opportunities for those with lower scores, especially with compensating factors. Take the time to improve your credit and explore the loan options that best match your financial situation.
By following the steps in this guide, you can increase your chances of securing a mortgage and achieving your dream of homeownership. Happy house hunting!
Frequently Asked Questions
What credit score do I need to get a mortgage?
The minimum credit score required for a mortgage varies depending on the loan type. FHA loans typically need a score of at least 580, while conventional loans require a score of 620. VA loans don’t have a set minimum, but most lenders look for a score between 580-620.
Can I get a mortgage with a credit score of 500?
Yes, it’s possible to qualify for an FHA loan with a credit score as low as 500, but this requires a 10% down payment. Most lenders, however, prefer applicants with scores of 580 or higher.
What credit score do I need for a conventional loan?
Most conventional loan lenders require a minimum credit score of 620. Higher scores, like 740 or above, can help you qualify for better interest rates and terms.
Do VA loans have a minimum credit score requirement?
The Department of Veterans Affairs (VA) doesn’t set a minimum credit score requirement for VA loans. However, most lenders usually require a score between 580 and 620 to approve a loan.
Is it possible to buy a house with bad credit?
Yes, you can buy a house with bad credit through options like FHA or VA loans, which have more flexible credit requirements. You may need to compensate with factors like a larger down payment or a low debt-to-income ratio.
What credit score do I need for a USDA loan?
USDA loans generally require a credit score of 620. Some lenders might accept slightly lower scores if the applicant meets other criteria, such as a strong repayment history or additional savings.
How does my credit score affect my mortgage interest rate?
Your credit score has a direct impact on the mortgage interest rate you receive. Higher credit scores qualify for lower interest rates, which can save thousands over the life of the loan. Lower scores typically result in higher rates and more expensive monthly payments.
What is the minimum credit score for a jumbo loan?
Jumbo loans, which exceed conforming loan limits, usually require a minimum credit score of 700 or higher. They also require a larger down payment, typically ranging from 10% to 20%, due to the increased risk to lenders.