When it comes to loans, a mortgage often stands as the largest one you’ll encounter in your lifetime. It’s no wonder that lenders impose a minimum credit score requirement for mortgages. A favorable score signals to lenders that you possess the ability to meet your payment obligations promptly.

Even if your credit falls below average, you still have options when it comes to securing a mortgage. However, those with higher credit scores generally qualify for a wider range of loan options and benefit from lower interest rates.

It’s important to note that credit score requirements vary among lenders and loan types. For instance, conventional loans typically necessitate a higher credit score compared to government-backed loans insured by the Federal Housing Administration.

No matter if your credit is impeccable or average, let’s explore what you can anticipate when you apply for a mortgage.

What is the minimum credit score required to purchase a house?

To purchase a house, a credit score of at least 620 is typically required for most loan types. However, having a higher score significantly increases your chances of approval. It’s worth noting that borrowers with scores below 650 represent only a small fraction of closed purchase loans.

Furthermore, applicants with scores of 740 or higher generally enjoy the benefit of the lowest interest rates. Mortgage lenders rely on the FICO score to assess your creditworthiness.

Minimum credit score requirements for mortgage loans vary depending on the type of loan.

Conventional loan: 620

While it is possible to obtain a conventional loan with a credit score as low as 620, it is important to note that these types of mortgages often have stricter requirements. Furthermore, having a higher credit score can significantly benefit you in terms of securing a lower interest rate. Additionally, borrowers with higher scores may also be eligible for reduced costs associated with private mortgage insurance (PMI), which is typically required if your down payment is less than 20% on a conventional loan.

FHA loan: 500

If your credit score falls in the 500s, your most favorable option for a home loan would be one insured by the Federal Housing Administration. However, it’s important to note that lenders can set their own credit requirements for FHA loans, and borrowers who barely meet these requirements may face more challenges when seeking approval.

FHA loans offer the flexibility of down payments as low as 3.5%. However, in order to be eligible for a low-down-payment FHA loan, a minimum FICO score of 580 is required. If your credit rating falls between 500 and 579, a 10% down payment will be necessary.

Lenders typically consider a borrower’s credit score below 600 as a factor of concern. However, they may still be willing to provide a loan if the borrower’s overall financial situation is secure.

VA loan: 640

VA loans, which are mortgages guaranteed by the Department of Veterans Affairs, offer a unique advantage for those looking to buy a house. Unlike other government-backed loans, VA loans do not have a set minimum credit score requirement. Instead, their main qualification is being a veteran, an active-duty military member, or an eligible spouse.

It’s important to note that while there is no government-set minimum credit score, VA lenders do have their own criteria. Typically, these lenders require credit scores in the low to mid-600s. However, these requirements may vary depending on the lender.

By providing this flexibility, VA loans make homeownership more accessible for those who have served our country.

USDA loan: 640

Similar to VA loans, home loans offered by the U.S. Department of Agriculture do not have a specific minimum credit score requirement. Lenders, however, may establish their own minimum score criteria. If your credit score exceeds 640, you may qualify for expedited credit processing when applying for a USDA loan.

Jumbo loan: 700

To secure a mortgage that exceeds the conforming loan limit, commonly referred to as a jumbo loan, most lenders will require a credit score of around 700 or above. As lending such a substantial amount of money involves inherent risks, lenders seek prospective homebuyers with strong financials, including a solid credit score.

If your FICO score is 740 or higher, you are likely to qualify for the most favorable jumbo mortgage rates. Utilizing a mortgage calculator can help you understand how even a slightly lower rate can have a significant impact.

Additional factors to take into account when seeking mortgage approval

Lenders take into account more than just your credit score when evaluating your eligibility for a mortgage. Other crucial factors also play a significant role in the decision-making process:

• Your Debt-to-Income Ratio (DTI) is a crucial calculation that expresses the percentage of your monthly loan payments in relation to your pre-tax income. This important metric provides lenders with insight into your ability to manage additional debt. A lower DTI is favorable, aiming for a percentage below 36% to maximize your eligibility for top-notch mortgage options.
• The loan-to-value (LTV) ratio determines the amount you owe on the loan relative to the value of the house. A lower LTV indicates lower risk for lenders. To reduce the LTV, consider making a larger down payment. This will enhance your overall financial position and provide greater confidence to lenders.
• Lenders typically require verification of your employment and a consistent income history spanning two years to assess your ability to repay a loan. However, if you are retired or not currently employed, your lender may request alternative forms of documentation to demonstrate your capacity to meet your monthly mortgage obligations.
• Lenders also consider your total net worth, which includes your cash savings, retirement accounts, investments, and other assets. This evaluation helps determine the duration for which you can sustain making payments in the event of a loss of your primary source of income.

What options are available if your credit score falls short of the requirement to purchase a house?

If you have bad credit or no credit, it may be difficult to obtain a mortgage unless someone you know is willing to assist. Having a co-signer with a higher credit score could increase your chances of securing the loan. However, if this option is not available, your best course of action would be to wait and focus on improving your credit.

Steps to Boost Your Credit Score for Home Buying

If your credit score doesn’t meet the requirements for a favorable interest rate or the mortgage type you desire, it may be prudent to postpone your plans of buying a home. Instead, consider utilizing this time to enhance your credit profile, which will increase your chances of securing better terms in the future.

Here’s how:

• Ensure timely payment of all bills: Of all the factors that influence your credit score, payment history holds the greatest weight.
• Keep credit card balances low: According to experts, it is advisable to utilize no more than 30% of the credit limit on any credit card. In fact, a lower utilization rate is even more beneficial. Your credit utilization, which refers to the amount of available credit you are using, is the second most significant factor that influences your credit score.
• Review your credit reports: Carefully review your credit report for any errors that may negatively impact your score. If you come across any discrepancies, be sure to dispute them. Remember, from now until December 2023, you have the right to receive one free credit report per week from each of the three major credit bureaus: Experian, Equifax, and TransUnion.
• Maintain open credit card accounts: When you close a credit card, it decreases your available credit and can have a negative impact on your credit utilization, potentially lowering your credit score. To prevent your account from being closed due to inactivity, it’s advisable to make occasional charges and promptly pay them off. This not only maintains your credit history but also ensures that your issuer doesn’t close your account.
• Use caution when applying for new credit: To establish a more robust credit history, consider adding a new credit card, secured credit card, or credit-builder loan if you currently have a limited credit file. Keep in mind that it is advisable to wait at least six months after opening a new account before applying for a mortgage. Therefore, it is crucial to time your applications wisely to ensure a smooth process.

Monitoring Your Credit and Tracking Your Progress

As you strive to achieve the credit score required to purchase a house, it’s beneficial to monitor your progress using a complimentary credit score. Numerous credit cards and personal finance websites provide this service to help you keep track of your journey.

Most free credit score services rely on VantageScore, a credit scoring model that competes with FICO. While mortgage lenders typically use older versions of the FICO model (FICO 2, 4, or 5), you can track your progress using either score. While your VantageScore and FICO score may not be identical, they typically exhibit similar trends.

To obtain your current FICO score, which reflects what mortgage lenders will see, you will need to acquire a comprehensive FICO report. This can be done by visiting myFICO.com and subsequently opting to cancel the monthly service instead of incurring an ongoing fee.

However, if you have a credit score in the excellent range or close to it according to a free credit score source, there is no need to pay to check your FICO scores. It is highly likely that your credit is good enough to qualify for a competitive mortgage rate.

Contact Sword Mortgage To Learn More About Your Options

Call (770) 757-5750 or complete our online form to speak with a loan expert at Sword Mortgage to get help navigating your options and find a loan that fits your needs today.