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In order to get a mortgage, you not only need to be able to document your ability to pay it back, but also show you have a high enough credit score for a mortgage. Mortgage lenders want to see a reasonably good credit history, so let's look at what credit score you need for a mortgage.
It might be reassuring to know you don't need an excellent credit score for a mortgage -- or even a good score in many cases. In fact, if your employment, assets, and other qualifications can justify the loan. In fact, you might be surprised by the minimum credit score for a home loan.
A conventional or conforming mortgage is the most common type of home loan. This term refers to mortgages that meet the underwriting standards of Fannie Mae or Freddie Mac.
The minimum FICO® Score required for a conventional mortgage is 620. However, 620 is the bare minimum credit score for a home loan. The borrower's down payment, reserves, and other debts also play a part. According to Fannie Mae's latest underwriting standards, the minimum score can be as high as 700. And it's worth noting that the 620 score is the minimum threshold set by Fannie and Freddie -- individual lenders might have their own stricter requirements.
An FHA mortgage is insured by the federal government. In order to be eligible for an FHA mortgage, borrowers must have at least two established credit lines, a debt-to-income ratio (DTI) of 31% or less excluding the expected mortgage payment, and no delinquent federal debts.
As long as those requirements are met, an FHA borrower with a rather low credit score for a home loan can still qualify. FHA loans with a rock-bottom 3.5% down payment are available with FICO® Scores as low as 580. And if a borrower can come up with at least 10% down, the FICO® Score requirement drops to 500.
It's important to mention that lenders can set stricter standards if they want, just as with conventional loans. For example, a mortgage lender that offers the low-down-payment FHA loan could potentially set its own minimum FICO® Score requirement at 600, not 580.
The caveat to FHA loans is that the mortgage insurance is expensive. FHA loans have ongoing annual mortgage insurance premiums of between 0.45% to 1.05% of the loan balance. That's competitive with the private mortgage insurance (PMI) paid by conventional borrowers with less than 20% down. However, FHA loans also have an upfront mortgage insurance premium of 1.75% of the loan amount. With a $250,000 loan, this translates to $4,375 -- not a small amount of money.
Several of the best mortgage lenders for first-time home buyers offer lower down payments and more flexible credit requirements. In addition to conventional and FHA mortgages, the credit score for a mortgage can be lower with the following types of mortgage loans:
VA Loans: VA Loans are available to certain current and former members of the U.S. Armed Forces. There is no formal minimum credit score for a home loan, but most lenders want to see a FICO® Score of at least 620 to originate a VA loan.
USDA Loans: A USDA loan is a type of financing available for borrowers with low-to-moderate income buying homes in certain rural areas. While there isn't a set-in-stone credit requirement, most USDA lenders want to see a score of at least 640.
Your credit score for a home loan is certainly an important factor, but it is just one piece of the puzzle. In addition to your FICO® Score, your mortgage lender will consider:
If your credit score is close to the minimum, you're likely to need very strong qualifications in the other areas. For example, according to Fannie Mae's latest underwriting guidelines, in order to qualify for a mortgage with a 620 FICO® Score, you'll need either:
Most mortgage borrowers have significantly higher credit scores than their particular loan program requires. As of September 2020, the average home buyer who obtained a conventional purchase mortgage had a FICO® Score of 759, according to Ellie Mae -- a score largely considered to be great credit.
What's more, the average buyer put 19% down and had an overall debt-to-income ratio of 35%. This is more money down than a conventional loan requires, and is also a significantly lower DTI.
Even for an FHA loan, the average credit score for a mortgage was a 684 FICO® Score. That's generally considered to be good credit, and significantly above the minimum requirement. The average FHA borrower only put 4% down and had a relatively high 43% DTI. This makes sense, as FHA loans are typically used by borrowers with little cash to put down.
Just because you can qualify for a conventional mortgage with a 620 FICO® Score, or an FHA loan with a FICO® Score in the 500s, doesn't mean it's the best idea. FHA loans are expensive in general, and conventional lenders base your mortgage's interest rate on your FICO® Score, among other factors. With a low FICO® Score, you could end up paying tens of thousands of dollars in additional interest on your loan, relative to a top-tier borrower.
Let's put some numbers behind this. Zillow's latest data puts the median home value in the United States at about $260,000. A 20% down payment (the average for a conventional loan), would imply a mortgage amount of $208,000. Here's what type of mortgage payment this could translate to on a 30-year fixed-rate conventional mortgage. We've based our calculations on the latest average rates by credit score for a home loan:
|FICO® Score Range||Average APR||Monthly Payment||Total Interest|
Here's the point. With a bare-minimum 620 FICO® Score, it's possible to qualify for a conventional mortgage loan if the rest of your qualifications are strong. However, you'd end up paying nearly $65,000 more in interest than a borrower with an excellent FICO® Score for the exact same house. Even jumping to the next highest credit tier could save you lots of money. So, if you have a relatively low credit score, it could make sense to put your home-buying plans on hold and work on improving your credit score. And, since even a fraction of a percent makes a difference, it's worth shopping around the best mortgage lenders to get the best rate.
You don't need a great credit score for a home loan. Well-qualified buyers can get a conventional mortgage with a FICO® Score of 620 and an FHA mortgage can be obtained with a FICO® Score of as little as 500.
Having said that, the stronger your mortgage application is, the lower interest rate you can expect. Your credit score is a big piece of the mortgage approval puzzle. A better credit score for a mortgage can translate into tens of thousands of dollars in interest savings over time.
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
We've compiled a first-time home buying guides to help you confidently take the next step to land your best mortgage deal. Check out The Ascent's first-time home buyers guide for essential education.
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