Many things factor into getting a mortgage, but it starts with your credit score. If your credit score isn’t up to snuff, nothing else matters. Credit.com spoke with a handful of seasoned lending experts to find out what credit score you need to get your foot in the door of your dream home.
Why Your Credit Score Matters
“The primary function of the credit score is that it’s used in pricing the loan,” Joe Parsons, branch manager of Caliber Home Loans, in Dublin, Calif., said. That’s because lenders use what’s known as a risk-based pricing matrix, or table, to determine the interest rate of your loan based on this data.
“When we are pricing your rate on a loan, we look at that matrix and what the credit score is and the loan-to-value ratio,” he explained. “That’s going to determine the adjustment to the interest rate.”
In this way, your credit score will also determine how much you pay over the life of the loan. The lower the score, the more money you’re likely to shell out.
“A borrower putting a 20% down payment with a 740 score will get an interest rate of about 3.62%,” Parsons said. By contrast, “a borrower with the same parameters and a 620 score will get an interest rate of about 4.5% because of that risk-based pricing matrix.”
Special credit situations, such as whether the borrower foreclosed or had a short sale on their previous home, may determine the outcome of the loan, Parsons said. However, these applications are unique and evaluated by an underwriter on a case-by-case basis.
If you’re unsure where your credit currently stands, and are serious about buying a home, now’s the time to find out. You can do this by viewing two of your free credit scores, updated every 14 days, on Credit.com.
What’s the Lowest Score I Need for an FHA Loan?
The credit score home loan scale that is most often used is 300 to 850. The Federal Housing Administration (FHA) will allow a borrower with a 500 score to secure a loan, Parsons said, however, there’s no guarantee that a lender would help make that happen, even with a 10% down payment.
A 600 credit score isn’t a high score, either, but that’s generally considered the minimum for an FHA-backed loan, Scott Sheldon, a senior loan officer with Sonoma County Mortgages, in Petaluma, California, said. (For the unfamiliar, FHA loans are popular among first-time homebuyers and require a minimum downpayment of 3.5%.) These minimum credit scores for a home loan may get your foot in the door, but your goal should be to work on improving them.
Heather McRae, a senior loan officer for Chicago Financial Services, said 580 is the lowest score she’s seen in recent loan approvals, and she hasn’t seen anything lower than that in a long time. According to Parsons, an applicant with a 580 score, would “have to have a bunch of bad stuff on their credit report: some combination of maxed-out credit cards, late payments, possibly judgments from small claims court, and possibly tax liens. Those elements are typically an indication that the person does not have control of their personal finances.”
If this describes your situation, “you’re going to have a lot — I mean, a lot — of hoops to jump through,” Sheldon warned.
And the lender may be wary of working with you, Parsons said. “The way I tend to think about it is, even if I can do the loan, I’m not really doing them a favor by getting them into that obligation. You have to get your house in order to do yourself some good, from a financing standpoint.”
What’s the Lowest Score I Need for a Conventional Loan?
Conventional loans, which require borrowers to make a 5% down payment, have higher credit score home loan standards, Parsons said. With these, the minimum credit score required is 620 — typically what you’d see on a credit report due to a combination of high credit card balances (i.e., using more than 30% of your available credit limit) and scattered late payments. “Any lender will make a loan to somebody with a 620 credit score,” Parsons said, but for applicants “it may not be a total walk in the park and they’ll need to provide documentation” of income and assets.
The Optimal Score for Securing a Mortgage
With all these minimum credit score home loan requirements, you may be wondering what credit score lenders like to see. According to Parsons, that number is 740 or higher. Sheldon called 680 the unofficial minimum, saying that’s “the credit score to strive for if you want to have choice and flexibility.” If you’re already close to 680, he said to aim higher for better loan terms. “You really want your score in the 740 range to get optimal pricing on any given day.”
With conventional mortgages, in particular, Parsons said, “a score at 740 or higher is the score needed to get the best rate in that risk-based pricing matrix.”
Tricks for Improving Your Credit Score
If you’re thinking of buying a home, you’ll want to prepare for the mortgage process now by building your credit the smart way. Doing so can take some time, especially if you’ve had problems with your credit in the past, but if you start now, you’re more likely to get yourself in a better position to buy the home of your dreams.
To begin improving your scores, Parsons recommends paying down any revolving debt, or debt you’ve been carrying on a line of credit for more than one pay period. “That could well be costing you 15 points on your score,” he said, so it’s worthwhile to review your balances now and take steps to reduce them accordingly.
Beyond that, be sure to take care of any recent collection accounts for late payments, which could easily drag down your scores, Parsons said.
If you’ve yet to review your credit report — which you can pull for free, annually, by visiting AnnualCreditReport.com — consider doing so now. Go through it with a fine-toothed comb, looking for any errors that may warrant correction, and see what needs to improve. (Find problems and need to craft a dispute letter? This guide can help you get started.) You may find old tax liens or judgments that require following up, or perhaps learn there’s nothing to worry about. Either way, you’ll want to know so your homebuying process can go as smoothly as possible.
Jill Krasny contributed to this article.