Thursday, 28 January 2021

What’s the Minimum Credit Score for a Home Loan?

What’s the Minimum Credit Score for a Home Loan?
26 Mar

If you’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 it’s time to apply for preapproval or take some steps to boost your credit first.

The minimum credit scores for home loans

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, we’ll explain why you should aim for a higher score instead of purchasing a home with bad credit.

Loan type Minimum credit score
Conventional 620
FHA 500 with 10% down payment
580 with 3.5% down payment
VA No credit minimum, but 620 recommended
USDA 640

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:

  1. The interest rate will be higher to compensate the lender for extra default risk.
  2. Private mortgage insurance premiums (PMIs) are impacted by credit scores and are required with less than a 20% down payment.

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 doesn’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.

What is a good credit score to buy a house?

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.

  • 740 credit score. You’ll typically get the best interest rates for a conventional mortgage with a 740 credit score. If you make less than 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score home loans. Offered by FHA-approved lenders with at least a 10% down payment.

Mortgage rates by credit score

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 Mae’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
≥ 740 0.75% $1,500
720-739 1% $2,000
700-719 1.5% $3,000
680-699 1.5% $3,000
660-679 2.25% $4,500
640-659 2.75% $5,500
620-639 3.5% $7,000

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.

Steps for improving your 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.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Keep balances low. The best plan is to pay your entire balance off as your charge credit cards. But if you do carry a balance, try to keep it at 30% or less of the credit limit.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get the best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

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