Credit Score Needed to Buy a House in 2020



The minimum credit score required to get a mortgage varies depending on the lender and the type of mortgage loan you’re applying for.

You will need a 500 credit score to qualify for an FHA loan with 10% down. But, you need 3.5% down if you have at least a 580 score.

This article takes an in-depth look into the credit score needed to buy a house for each type of mortgage program.

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Minimum Credit Score Requirement for Each Loan Type

Your credit score is the most important factor in determining if you qualify for a loan. The credit score needed to buy a house will depend on the lender, your down payment, and the type of mortgage you apply for.

Loan Type

Minimum Credit Score

FHA Loan

580 credit score with 3.5% down
500-579 credit score with 10% down

USDA Loan

640

VA Loan

580-620

HomeReady / Home Possible Loan

620

FHA 203k Rehab Loan

640

Conventional Loan

620

Conventional 97 Loan

680

Piggyback Loan

680

FHA Loans 

  • 580 credit score with 3.5% down, or
  • 500 credit score with 10% down

 

FHA loans have the lowest credit score requirement for any mortgage program. With at least a 580 credit score, Borrowers can qualify for an FHA loan with just 3,5% down. A 10% down payment is needed with a 500-579 credit score. 

VA Loans

  • Varies by lender,  but 580-620 credit score requirement is typical.
  • No down payment

 

VA loans are a benefit given to Veterans of the military; they offer 100% financing with no mortgage insurance. The Veteran’s Administration, who guarantees the loan, does not have a set minimum credit requirement, but most lenders require between a 580-620 credit rating to be eligible for a VA loan.

USDA Loans

  • Minimum 640 credit score
  • No down payment

 

USDA loans are government-backed mortgage loans offered by the US Department of Agriculture. USDA mortgages are for low-to-median income borrowers in rural areas of the country.

Conventional Loans

  • 620 minimum credit score
  • 3%-20% down payment

 

A conventional mortgage is a home loan that is not backed by the government but by private mortgage insurance companies. Conventional loans require a 620 credit score and have programs for down payments between 3%-20%.

Conventional 97 Loans

  • 620 minimum credit score
  • 3% down payment

 

Fannie Mae and Freddie Mac created loan options for low-income first-time homebuyers, the HomeReady, and Home Possible loan programs. A 620 credit score is required, with 3% down. They do have income limits and are only for first-time buyers.

Jumbo Loans

  • Minimum 680 credit score
  • 10%-20% down payment

 

If you need a loan that exceeds the conventional loan limit, you will need a jumbo loan. Because of the high loan amount, Jumbo loans present a bigger risk to lenders, requiring good credit and 20% down.

Compensating Factors for Poor Credit

Compensating factors reduce the lender’s risk, allowing them to approve borrowers with low credit scores.

Mortgage companies will also want to see recent solid payment history with no late payments or collection accounts in the past 12 months: a low debt-to-income ratio and stable employment history.

Compensating Factors

* Limited payment shock

* 5+ years with the same employer or in the same industry

* High income

* Large amount in savings

* Good credit

* 20% down payment

* Low debt-to-income ratio below 36%

* Residual Income

* Limited debt (credit cards, auto loan, etc.)

How Your Credit Score is Calculated

How Your Credit Score is Calculated

Payment History

35%

Your payment history is the single biggest factor in determining your credit rating. This includes late payments and collection accounts. Making your payments on time is the best way to a good credit score.

Credit Utilization

30%

The amount of available credit you're using compared to your credit limit is called your credit utilization ratio. It accounts for 30% of your overall score. The lower your card balances, the higher your credit score will be. Try to keep your credit utilization ratio below 25%.

Length of Credit

15%

How long your credit accounts have been opened accounts for 15% of your score. The longer your accounts stay open, the better your score will be. This is why it is wise to keep your credit accounts open.

Types of Credit

10%

10% of your score is based on having multiple types of credit accounts open, such as credit cards, auto loans, mortgages, etc. It's best for your score to have a good mix of credit and loan accounts.

Credit Inquiries & New Accounts

10%

Whenever you apply for a loan, there is a new inquiry into your credit history. These inquiries count against your score for up to 12 months. Opening a new account will also lower your credit score initially. 

What Lenders Look at Besides Your Credit?

A mortgage lender will look at more than just your credit rating; they look at the whole credit picture. Negative credit history, such as late payments, collection accounts, or excessive debt, could cause your loan to be denied.

Credit and Debt Guidelines

* No more than one late payment in the last 12 months

* No late mortgage payments

* 36 month waiting period after a Bankruptcy or foreclosure

* Limited unpaid debt in collections

How Your Credit Score Affects Your Mortgage Rate

Your credit score is directly tied to the interest rate you receive on a loan. Bad credit often leads to higher mortgage rates and increased closing costs, leading to a higher monthly payment. Borrowers with a higher credit score will get the best interest rates and loan terms. 

  • 579 and lower – If you are approved for a mortgage with this low of a score, you will have a credit score as much as 2% higher than the current lowest rate.
  • 580-619 – You can expect an interest rate as much as 1% higher than the lowest rates available.
  • 620-679 – With a credit score in this range, your interest rate will be slightly affected. Rates could be .5% higher than someone with great credit will receive.
  • 680-739 – This is the range most homebuyers are at; your rate will not be affected much at all in this range.
  • 740 and higher – You will be offered the best rates mortgage companies have to offer.

 

Tips to Improve Your Credit Score Before Applying

Pay down your credit card balances

Your credit utilization ratio is the percentage of credit you are using on your credit card accounts. Credit utilization ratios account for 30% of your credit score.

The higher the balance you have on your credit cards, the lower your credit score will be. Make sure to pay your credit card balances as low as possible before applying for a mortgage.

Negotiate a “Pay for Delete” settlement with creditors

If you have any collections on your credit report, they are obviously having a significant negative impact on your credit score. You can contact the collection agencies directly and ask them if they will do a pay for delete.

A pay for delete is an agreement that you agree to pay the balance, and in return, the creditor agrees to remove the account from your credit report. If a creditor does not agree to this, there is no reason to pay off collections unless your lender tells you. Paying collection accounts does not improve your credit score.

Become an Authorized User

If you have a family member or close friend with a credit card. They can add you as an authorized user on their account. The entire credit history of the account will be added to your credit report.

FICO does consider authorized user accounts into their credit scoring algorithm. This is a quick way to add up to 30 points to your FICO score.

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