A lot of first-time home buyers worry that their credit scores are too low to buy a home. First, know that whether your credit score is “good” or “bad” is subjective and won’t affect your home-buying. Second, mortgage lenders are bound by specific rules which determine what credit scores you need to buy a house, and those rules vary by your loan type.
Conventional loans are the most common loan type. On the credit score scale, which ranges from 350-850, conventional loans require a credit score of at least 620. Other loan types allow for lower credit score minimums, and some mortgage programs have no credit score requirement whatsoever.
Read on for details by loan type, or jump to learn more about your credit score:
- Minimum Credit Score by Loan Type
- What Affects Your Credit Score?
- How to Improve Your Credit Score
- What Mortgage Lenders Look For
- How to Get a Home With a Bad Credit
Minimum Credit Scores by Loan Type
Conventional Loan | Credit Score: 620
Conventional loans are the most common home loan and have a hard minimum credit score of 620. Conventional loans are issued through mortgage lenders, mortgage brokers, and credit unions. Conventional loans are the default option for home buyers because of their low rates and simple approvals.
Conventional loan approval requires:
- A mortgage application
- Lender-required documents
- Credit history
- Current credit score
FHA Loan | Credit Score: 580
FHA mortgages are the original mortgage loan, developed by the Federal Housing Administration in the 1930s to keep homeownership attainable. FHA loans are more inclusive than other loan options because of their relaxed down payment requirements, and because the FHA doesn’t change your interest rate based on your credit score.
In fact, FHA loans don’t require home buyers to have a credit score at all, although many lenders want to see a minimum score of 580.
FHA loan approval requires:
- 3.5% down payment
- Loan lengths must be 15 years or longer
VA Loan | Credit Score: 580
VA loans are backed by the Department of Veterans Affairs. VA loans are affordable home loans for active-duty servicemembers and veterans.
Because the VA guarantees its loans against losses, mortgage lenders make VA loans at very low interest rates and, historically, VA mortgage rates are often the lowest of all available mortgage loans. VA loans don’t require a downpayment.
VA loans:
- Are available as 100% mortgage loans
- Have lower interest rates as compared to conventional loans
- Require a Certificate of Eligibility (COE)
USDA Loan | Credit Score: 620
USDA loans are government-backed mortgages available for homes outside of densely-populated areas. The USDA program covers about 91% of the U.S. including rural areas, small towns, and many suburbs.
USDA mortgage loans don’t require a down payment and offer interest rates which average 0.50% lower than conventional loan rates. USDA guidelines require credit scores of at least 620, but exceptions can be made for home buyers with extenuating circumstances.
USDA loans:
- Can only be used for non-urban home purchases
- Have no down payment requirements
- Require a credit score of 620 or higher
Jumbo Loan | Credit Score: 680
Jumbo loans service home buyers whose mortgage loans are too large for the local mortgage loan limit. There is no specific credit score requirement for a jumbo mortgage, though higher scores are more likely to be approved and may be assigned a lower interest rate.
Jumbo loans can be used for a variety of property types.
Jumbo loans:
- May require a down payment of between 5% and 25% depending on credit and income
- Require higher credit scores
- Are not government-backed
What Changes Your Credit Score?
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Credit scores help your lender determine the likelihood that you’ll make timely mortgage payments. Fair Isaac and Co. (FICO) uses these factors to calculate your credit score:
- Your payment history (35%)
- Your current credit usage (30%)
- The length of your credit history (15%)
- Types of credit (10%)
- Recently opened credit lines (10%)
These 5 factors provide a glimpse into your financial habits and history, and help lenders assess your financial health. Home buyers with lower credit scores are typically assigned a higher interest rate.
How to Improve Your Credit Score
To boost your credit score for an upcoming mortgage approval, first check your credit report to learn what’s comprising your score. All consumers get access to a free annual credit report at AnnualCreditReport.com.
If you’ve never reviewed a credit report, it can feel overwhelming. There are public resources that can help you, or you can ask for help in our chat. We’ll consider the factors that impact your credit score and discuss ways to make improvement, like opening a secured credit card account or shifting balances between charge cards.
Here are the best habits to improve your credit score:
- Pay your bills on time — Payment history accounts for 35% of your FICO credit score
- Lower your credit utilization — Increase your debt payments temporarily or request a credit limit increase
- Avoid new credit lines — Hard credit inquiries are performed for a new line of credit and can affect your credit score for the next six months
- Don’t close old accounts — Keep old credit lines open and catch up on old payments or delinquencies
- Be patient — It can take up to 6 months to make big changes in your credit score, so do the work and wait it out
Credit scores don’t improve overnight, and keeping your debt to a minimum pays off when you’re planning to buy a house. Even small credit score improvements can reduce the interest rate you get, which saves you tens of thousands of dollars in the long-run — enough to fund a retirement or college tuition!
What Mortgage Lenders Look For When Approving a Home Loan
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When you apply to get pre-approved, your lenders will review your credit history and consider your current credit outlook. This includes looking at:
- How on-time have you been with your payments and obligations?
- What does your current debt load look like, and how is spread out?
- How much experience do you have managing credit?
- Have you been recently trying to acquire access to new sources of credit?
- Do you let items go into collection?
- Have you previously filed for bankruptcy?
Lenders ask these questions to get comfortable about you. Your financial health isn’t the only consideration lenders make, but how you manage your bills tells a large part of your story.
Lenders also look for specific credit events known as derogatory items, like bankruptcy or delinquent accounts.
Derogatory items don’t disqualify a mortgage approval. Generally, it’s only required that they’re historical events and not current ones. For example, you can get approved for a mortgage if you’ve declared bankruptcy in the past, or if you’ve lost a home due to foreclosure.
Lenders know that life is unexpected and bad things happen. What’s important is what’s happened in the time since the derogatory event occurred.
How to Get a Home Loan With Bad Credit
You don’t have to give up on your dream of homeownership because of a low credit score or less-than-perfect credit history Here are a few ways first-time home buyers buy homes with bad credit or no credit:
Cancel Out Your Low Credit Score With A Larger Down Payment
Low credit scores create risk for mortgage lenders, and large down payments take risk away. Therefore, buyers with the ability to increase their down payment size are more likely to get mortgage-approved.
Ask Multiple Lenders
The U.S. government establishes rules for conventional, FHA, VA, and USDA loan approvals, but mortgage lenders sometimes create additional, more stringent requirements to be met. If your mortgage application doesn’t pass its first test, try again with a different mortgage lender. It’s common for loans to be approved on the second or third attempt.
Get a Co-Signer
If you’re unable to qualify for a mortgage and have somebody in your life who would serve as co-signer, ask your mortgage lender the best path forward. A co-signer is somebody who agrees to joint responsibility for your mortgage, including repayment.
Co-signers don't have to live with you, but they will share ownership of the home. If you can't qualify on your own, then this is worth exploring.
Your credit score isn’t the only factor for mortgage approval. However, it’s a key indicator of your financial health. Track your credit, make on-time payments, and get help to choose the home loan that’s right for you. Chat with us if you have questions about your credit score and loan options.
Happy homebuying.
Sources: Fannie Mae | Investopedia 1, 2, 3
