Credit scores can be a confusing topic for even the most financially savvy consumers. Most people understand that a good credit score boosts your chances of qualifying for a mortgage because it shows the lender you’re likely to repay your loan on time.
But do you know the minimum credit score you need to qualify for a mortgage and buy a house? And did you know that this minimum will vary depending on what type of mortgage you are seeking?
The Importance Of FICO®: One of the most common scores used by mortgage lenders to determine credit worthiness is the FICO® Score (created by the Fair Isaac Corporation). FICO® Scores help lenders calculate the interest rates and fees you’ll pay to get your mortgage.
While your FICO® Score plays a big role in the mortgage process, lenders do look at several factors, including your income, property type, assets and debt levels, to determine whether to approve you for a loan. Because of this, there isn’t an exact credit score you need to qualify. But the following guidelines can help determine if you’re on the right track.
Minimum Credit Score By Mortgage Loan Type
The minimum credit score you need to qualify for a mortgage in 2020 depends on the type of mortgage you’re trying to obtain. Scores differ whether you’re applying for a loan insured by the Federal Housing Administration, better known as an FHA loan; one insured by the U.S. Department of Veterans Affairs, known as a VA loan; or a conventional mortgage loan from a private lender:
Type of loan
Minimum FICO® Score
FHA loan requiring 3.5% down payment
FHA loan requiring 10% down payment
500 - Quicken Loans® requires a minimum score of 580 for an FHA loan.
No minimum score. However, most lenders, including Quicken Loans, will require that your score be at least 620
Conventional mortgages are home loans that follow the standards set by Fannie Mae and Freddie Mac. They’re uninsured by any government agency. If your credit score is solid – most lenders consider FICO® Scores of 740 or higher to be excellent ones – you’ll usually be able to qualify for a conventional loan with a low down payment requirement and low interest rate. Conventional loans are typically best for those with good or excellent credit, as these loans require a higher credit score than an FHA loan.
These loans tend to offer the most competitive interest rates and flexible repayment periods, such as 15- and 30-year mortgage terms.
Minimum Credit Score Needed: At Quicken Loans, your credit score for a conventional loan must be 620 or higher. Various lenders have different requirements and may require a different score.
FHA loans are insured by the Federal Housing Administration, making them less risky for lenders and, because of this, easier to qualify for than conventional loans. They offer down payments as low as 3.5% and low-equity refinances, which allow you to refinance up to 97.75% of your home’s value.
FHA loans can benefit borrowers with lower credit scores or those who spend a significant portion of their income on housing. Current homeowners who are underwater on their mortgage – and could lower their monthly payment by refinancing – may also benefit from an FHA loan.
Minimum Credit Score Needed: You’ll need a minimum credit score of 580 to qualify for an FHA loan that requires a down payment of just 3.5%. There is no minimum FICO® Score, though, to qualify for an FHA loan that requires a down payment of 10% or more. However, FHA loans are originated by private lenders, and these lenders will usually have their own minimum credit score requirements. For instance, the minimum FICO® Score for an FHA loan through Quicken Loans is 580.
For a standard FHA loan, a minimum of one credit score is required to qualify. If your lender obtains all three of your credit scores, it will use the middle score for consideration. If you apply for a mortgage with your spouse, lenders will use the lower of the two middle credit scores.
If you meet the requirements, a VA loan, insured by the U.S. Department of Veterans Affairs, can be a smart financial move. That's because these loans don't require any down payment at all. They're also available to borrowers with lower credit scores.
The difficult part is meeting those eligibility requirements. You must be a member or veteran of the U.S. Military or a member or veteran of the U.S. Military Reserves or National Guard. Spouses of military members who died while on activity duty or because of a service-related disability can also apply for one of these loans.
You won't be charged for private mortgage insurance when taking out a VA loan, another benefit of these products. VA loans, though, do charge a one-time funding fee. This fee varies depending on your down payment and the type of military service you logged. For instance, if you are a member or veteran of the U.S. military and don't put up any down payment, your upfront fee will be 2.3% of your loan amount in 2020.
Minimum credit score needed: The Department of Veterans Affairs sets no minimum credit score for VA loans. But like FHA loans, private lenders originate these loans, and these lenders typically have their own in-house minimum credit requirements. Quicken Loans requires that borrowers applying for VA loans have a minimum FICO® Score of 620.
What Factors Go Into A Credit Score?
It’s important to know your credit score and understand what affects it before you begin the mortgage process. Once you understand this information, you can begin to positively impact your credit score or maintain it so you can give yourself the best chance of qualifying for a mortgage.
While exact scoring models may vary by lender, some variation of the standard FICO® Score is often used as a base. FICO® takes different variables on your credit reports, such as those listed below, from the three major credit bureaus (Equifax®, Experian™and TransUnion®) to compile your score. FICO® Scores range from 300 –850. From this information, they compile a score based on the following factors:
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New credit (10%)
What Else Do Mortgage Lenders Consider?
Your credit score is a key factor in determining whether you qualify for a mortgage. But it’s not the only one lenders consider.
Income: Lenders will also look at your income. They want to make sure you make enough money each month to afford your payments.
Debt-To-Income Ratio: Lenders also look at your monthly debts. Lenders vary, but they generally want your total monthly debts, including your estimated new mortgage payment, to consume no more than 43% of your gross monthly income. If your debt-to-income ratio is higher, you might struggle to qualify for a mortgage.
Down Payment: The bigger your down payment, the more likely it is that you’ll qualify for a mortgage with a lower interest rate. That’s because lenders think you are less likely to stop making your payments if you’ve already invested a significant amount of your money into your loan. A higher down payment, then, makes your loan less risky for lenders.
Savings: Lenders want to make sure that you have funds available to make your mortgage payment if your income should unexpectedly dry up. Because of this, most will want to see that you have enough money saved to cover at least two months of mortgage payments.
Employment History: Lenders vary, but they usually like to see that you’ve worked at the same job, or at least in the same industry, for at least 2 years. They believe you’re less likely to lose that job, and that stream of income, if you’ve built up a longer work history.
Can You Get A Home Loan With Bad Credit?
It’s possible to qualify for a mortgage even if your credit score is low. It’s more difficult, though. A low credit score shows lenders that you may have a history of running up debt or missing your monthly payments. This makes you a riskier borrower.
To help offset this risk, lenders will typically charge borrowers with bad credit higher interest rates. They might also require that such borrowers come up with larger down payments.
If your credit is bad, be prepared for these financial hits. You can qualify for a mortgage, you’ll just have to pay more for it.
What’s The Best Way To Improve Your Credit?
Fortunately, it’s possible to boost your credit score. Be aware, though, that there are no quick fixes. It takes time to improve an ailing credit score.
Check Your Credit Report For Errors: You can order one copy of each of your three credit reports – maintained by Experian, Equifax and TransUnion – each year from AnnualCreditReport.com. Once you get these reports, check them for errors. Maybe one of the bureaus says you forgot to make a car payment last year. If that’s a mistake, contact the bureau and correct it. Erasing such an error could immediately boost your credit score. A great way to stay on top of your credit score is through Rocket HQSM. Create an account for free and review your free TransUnion credit report and track your VantageScore® 3.0 credit score and how you can improve it if necessary.
Become An Authorized User: A family member could help you boost your credit score by adding you as an authorized user on an existing credit card account. When you’re an authorized user, you’ll get your own credit card – linked to your family member’s account – that you can then use. Whenever you or the account’s primary user makes a payment, your score will gradually improve. Don’t run up debt on this card, though. If you do, you could hurt the primary user’s credit score.
Pay Your Bills On Time: Paying your bills on time each month is the surest way to improve your credit score. Making certain payments late – credit card, mortgage loan, auto loan, student loan, personal loan – could cause your credit score to fall by 100 points or more. (A payment is officially considered late and reported to the credit bureaus if you pay more than 30 days past the due date.) Making payments on time each month will cause your FICO®Score to gradually rise.
Pay Down Your Credit Card Debt: Paying down your credit card debt is another way to steadily improve your score. Don’t, though, cancel a credit card account once you pay it off. Doing this could automatically increase your credit-utilization ratio and cause your score to fall.
Being aware of your credit score can help your dream of homeownership become a reality.