The type of mortgage loan you apply for will determine the minimum credit score requirements. In general, commercial mortgages require higher credit scores—around 620—than federally backed loans. FHA loans require at least a 500, while USDA and VA loans don’t set a minimum credit score requirement.
Buying a home is one of the most expensive purchases consumers make. Because they are so expensive, home loans tend to be a bit more complicated than other types of loans. Your credit score helps determine the interest rate you qualify for, as well as the other terms you’re approved for. If your credit scores are high, it tells lenders that you’re responsible with your money—and will likely pay them back on time. If your score is lower, you’re seen as a riskier investment for most lenders.
Below, find out more about what a good credit score for a mortgage is considered. Then get some info on other factors that could affect your mortgage approval, as well as some tips for protecting or building your credit score before you apply for a home loan.
Here’s what we’ll cover in this piece:
- What score you need
- How to buy a home with bad credit
- Other factors that affect your mortgage loan
- Homebuying tips
What Credit Score Do I Need to Buy a House?
Your credit score will have a huge impact on your mortgage loan. Before you apply, make sure you know where you stand. ExtraCredit will show you 28 of your FICO® scores, including those used by mortgage lenders to determine eligibility.
Conventional loans tend to require a credit score of at least 620. Scores below that are considered “subprime”—which means you’ll likely pay more in interest and have more restrictive terms. A credit score above 670, on the other hand, gives you access to more favorable terms.
Keep in mind that these requirements ultimately depend on the lender you’re working with. Some may not accept any offers from applicants with scores below 740, for example, while some noncomforming loans are designed for people with poor credit. In those cases, you might be able to get a mortgage loan with a lower credit score, but your terms may not be as favorable.
Typically, government-backed loans require lower credit scores than traditional commercial mortgages. Here’s a look at the general minimum credit requirements for some common federally backed mortgage programs.
- USDA loans. USDA loans are partially backed by the federal government and are available to individuals buying qualifying suburban or rural homes. Though the program itself doesn’t set a minimum requirement for its lenders, their guidelines recommend a minimum credit score of 640. That’s considered the threshold for automatic approval using the USDA’s Guaranteed Underwriting System.
- FHA loans. FHA loans are backed by the Federal Housing Commission. These loans are common for first-time homebuyers because of their low credit score requirements. In fact, you can get approved for an FHA loan with a credit score as low as 500. If your score is at or above 580, you are eligible for the maximum financing available.
- VA loans. VA loans are available to veterans who meet certain requirements, as well as certain surviving spouses of deceased veterans. The VA doesn’t set a minimum credit score requirement. It requires lenders working via this program to review the qualifying person’s entire financial profile and to make a big-picture decision that considers credit score as only one factor.
Can I Buy a House with Bad Credit?
There are some challenges to buying a house with bad credit. If your score is below 620, loans available to you tend to come with higher interest rates and higher fees, A higher interest rate can have a big impact on your wallet. An interest point or two can make a huge difference in how much your house ends up costing in the long run.
In these cases, you might want to consider federally backed loans you qualify for with lower credit score requirements. If those aren’t available to you, consider saving up for a larger down payment or waiting until you can improve your credit score and potentially refinance for a better rate later on.
Is an FHA Loan an Option for Me?
If you know your credit scores will hurt your ability to get a conventional mortgage or affect your rate, a Federal Housing Administration (FHA) home loan might be an option for you. FHA loans have easier underwriting standards for buyers who have small down payments, low credit scores, or both.
The minimum FICO credit score for an FHA loan is 500. If your score is at least 580, you also need at least a 3.5% down payment. You can still get approved for an FHA loan with a credit score lower than 580 and down to 500, but you’ll probably need a larger down payment.
Other Factors That Affect Your Mortgage Loan
Your credit score is important, but it’s only one factor of your mortgage loan application. Here are some other common financial factors that can be important in determining whether you should apply for a home loan as well as whether you might get approved.
- Income. Lenders don’t want to invest in borrowers who simply aren’t able to pay the monthly mortgage. So they’ll want to see whether you have enough regular income to cover this added expense consistently. You should also consider this factor to understand what amount works in your budget for a monthly mortgage payment.
- Debt-to-income ratio. This is the ratio comparing your total monthly debt payments to your income. For example, if you owe $2,000 in debt payments monthly and have a $4,000 monthly income, your DTI is 50%. According to the Consumer Financial Protection Bureau, most conventional loans require a DTI of 43% or lower, including the mortgage payment.
- Down payment ability. You don’t necessarily need a 20% down payment. However, your ability to make one can open the doors to more mortgage options and reduce your interest rate and monthly mortgage payments.
- Savings. Cash savings can help you make the down payment. It also positions you to make your mortgage payment on time or cover other unplanned house expenses, making robust savings a good idea for most homebuyers.
- Employment history. Again, lenders want to know you can pay them every month. A solid employment history helps them see you as a less risky borrower.
- Overall credit profile. Lenders don’t check just your credit score when evaluating you for a mortgage. They look at your entire credit history. If you have unpaid collections, an active bankruptcy, or other types of major negative issues on your report, a mortgage provider is generally less likely to approve you. It’s a good idea to review your credit reports and correct any issues before you apply for a mortgage.
A Few More Homebuying Tips
If you’re in the process of choosing a lender and getting prequalified for a mortgage loan, there are several things you can do to begin the process on the right foot. Here are just a few tips.
Gather Your Financial Documents
Your mortgage lender will need to see certain financial records and documents. This is especially true of borrowers with bad credit. To fulfill this requirement, you want to get as organized as possible before applying for a mortgage loan.
Tax returns, pay stubs, bank statements, W-2s, and a list of all your debts are just a few documents you should gather and have ready to go. Be prepared to respond to the lender’s requests for additional documentation throughout the process as well.
Consider Using a Cosigner for the Loan
If your credit is bad and you still want to have access to decent mortgage rates, you can consider a cosigner. Cosigners can help borrowers with poor credit or inadequate credit histories increase their chances of loan approval.
Find Out Where Your Credit Stands
Higher interest rates make affordability a factor. Just a half-percent difference can make or break some budgets depending on the amount of the loan you take out. Know what your credit score is and maintain it or increase it as much as possible for a better possible rate and more affordable mortgage payments.
Ready to start your journey to homeownership? Begin by understanding exactly where you stand by signing up for ExtraCredit. The product’s Track It feature lets you view 28 FICO scores, which are common scores used in the mortgage process. If your scores need work, you can take advantage of Build It features that help you make positive moves toward better credit in the future.