If youâ€™re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a mortgage gives you a baseline to help decide if itâ€™s time to apply for preapproval or take some steps to boost your credit first.
A FICO score of 500 is the minimum credit score you need to qualify for a loan insured by the Federal Housing Administration (FHA). Meanwhile, conventional loans require at least a 620 score. These minimum score requirements serve as a starting point for what types of loans you might qualify for. Later, weâ€™ll explain why you should aim for a higher score instead of purchasing a home with bad credit.
|Loan type||Minimum credit score|
|FHA||500 with 10% down payment
580 with 3.5% down payment
|VA||No credit minimum, but 620 recommended|
Conventional loans. A 620 credit score allows you to make a down payment as low as 3%, but the mortgage payment may be hefty for a few reasons:
FHA loans. The FHA insures 500-credit-score home loans if you can make the 10% required down payment. FHA-approved lenders may approve loans with a 3.5% down payment and a minimum credit score of 580. The FHA limits how much you can borrow depending on where you live.
VA loans. Active-duty servicemembers, veterans and their eligible spouses have access to loans backed by the U.S. Department of Veterans Affairs (VA) with a 0% down payment. The VA doesnâ€™t set minimum credit score guidelines, but many VA-approved lenders require at least a 620 to qualify.
USDA loans. Low- to moderate-income buyers with at least a 640 credit score may qualify for a loan guaranteed by the U.S. Department of Agriculture (USDA). Only homes located in designated rural areas are eligible, and income limits apply. You may qualify with a lower USDA loan credit score in special circumstances.
Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to lower monthly payments and lower interest rates. In addition, a good credit score can also allow you access to more choices for home loan financing.
Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage. You can get a glimpse at how lenders assess the risk of different credit scores by looking at the rate mark-up for lower credit scores and down payment amounts.
The table below shows Fannie Maeâ€™s loan-level price adjustment (LLPA) and the related dollar cost of each credit score based on a 3% down payment for a $200,000 loan.
|Credit score||Price adjustment||Dollar cost|
With every 20 points lower in credit score, the dollar cost of the interest rate increases, reaching $7,000 for the lowest credit score. Rather than charging you the cost as a discount fee, the lenders hike up your interest rate to cover the risk of a lower credit score.
Now that you have an idea of the extra cost of getting a minimum credit score mortgage, following some of these tips may help you boost your score.