While it’s true that you need a FICO score above 740 to get the lowest interest rates and best loan terms, having fair or even bad credit doesn’t have to be a roadblock between you and your dream of home ownership.
In terms of specific numbers, most lenders want to see a minimum score of 620 for conventional mortgages and only 500 to 580 for government-backed FHA, VA and USDA loans. And some lenders may go even lower — if you have strong financials to back up your application.
For example, if you have bad credit or even a bankruptcy in your history, some lenders may look at alternative criteria like bank statements, cash on hand, IRAs and alternative income streams when making a decision. For these lenders, the ability to repay the loan is key.
The point is, there are no hard and fast rules when it comes to home loans. But be prepared to pay a higher rate and possibly higher origination fees if you do get approved for a mortgage with a lower credit score.
Required minimum credit scores differ across home loan products
Different types of mortgages have different eligibility requirements. Conventional loans have higher score requirements, while government-backed loans are more lenient to help lower-income and first-time homebuyers qualify.
Here are the general minimums for the most popular types of home loans:
- Conventional mortgages. A minimum score of 620 is typically required, but higher scores snag better rates and terms. And if your down payment is at least 20%, you can avoid paying private mortgage insurance (PMI).
- FHA loans. A minimum score of 580 is required with a 3.5% down payment and 500 with a 10% down payment. But even with a 10% down payment, you must pay private mortgage insurance (PMI) on an FHA loan for at least 11 years or until you refinance. And for less than 10%, it never drops off.
- USDA loans. Most lenders want to see a score of 640 or higher. However, USDA doesn’t have a minimum down payment requirement, making its loans ideal for low-income borrowers looking for a rural property.
- VA loans. The Veterans Administration has no set minimum, but lenders set their own criteria. Borrowers with past bankruptcies and foreclosures may also be acceptable with VA loans.
- Jumbo loans. Because the amounts for these loans are significantly higher than conventional loans, you’ll need to prove your creditworthiness with a minimum score of 700 in most cases, plus assets.
Keep in mind that you may be able to get around the minimums listed here if the underwriting process allows alternative criteria or you can prove your financial soundness. But remember, the best rates and terms go to borrowers with scores of 740 and up.
What credit score do mortgage lenders look at?
About 90% of lenders use your FICO Score, the most widely used among other credit scores. But different loan types use different FICO Score versions.
When applying for a mortgage, a lender will likely pull these three scores:
- FICO Score 5 based on Equifax data
- FICO Score 2 based on Experian data
- FICO Score 4 based on TransUnion data
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How your credit score affects your mortgage rate
Your credit score is among the more important factors a lender considers before deciding whether to approve you for a mortgage. But they also consider your debt-to-income ratio, your savings and how much money you have available to put toward a down payment.
Beyond helping to determine whether you can even get a mortgage, your score also plays a large role in the interest rate and payment terms you’re ultimately approved for. If your credit score is below average — which experts say is anywhere from 650 to 699 — lenders may factor in risk-based pricing when quoting your mortgage details.
To offset the perceived risk of taking on a borrower with a low credit score, a lender may increase the interest rate on a mortgage. It means that a credit score of 650 might get a higher interest rate than a credit score of 720, which could cost you tens of thousands more over the life of your mortgage.
What interest rate can I expect with my credit score?
The higher your credit score, the more likely you are to get the lowest rates. To compare, here are the average mortgage rates by credit score as of March 2023:
|760-850 (Very good to exceptional)||6.09 %|
|700-759 (Good to very good)||6.31%|
|660-679 (Fair to good)||6.70%|
Source: myFICO, https://www.myfico.com/credit-education/calculators/loan-savings-calculator/
Why you should check your credit score before applying for a loan
With so much riding on your credit score, it’s essential to check your credit report and clean up any errors before applying for a mortgage. You’re entitled to one free credit report each year from the three main credit reporting companies: Equifax, Experian and TransUnion.
By getting a copy of your report, you can:
- Correct any inaccurate information or errors in your report.
- Anticipate your likelihood of approval as well as your interest rate.
- See where you can improve your overall creditworthiness before buying.
See Understanding your credit report to learn how to get your free copies.
How to buy a house with bad credit
Buying a house with bad credit may be more challenging than if you have good or excellent credit, but it’s not impossible. But be prepared to pay a higher rate and possibly higher origination fees. This helps to compensate the lender for taking on more risk.
But the bigger question is, should you buy a house with bad credit? While that’s only a decision you can make, even a couple more points could result in paying tens of thousands extra in interest over the long haul. And the only way to get around this is to refinance your loan to a lower rate in the future — which can also cost thousands of dollars in closing fees.
To help you decide if buying a house with bad credit is the right option, see our Home loans for bad credit guide. It explains the types of home loans you’re most likely to qualify for, as well as tips on improving your credit before you buy a home, using a cosigner and getting the best rate — even with bad credit.
How to increase your chances of approval
Regardless of your credit score, factors that can sway a decision in your favor include:
- A down payment of 20% or more. The bigger your down payment, the lower the loan-to-value (LTV) ratio and the less risk the lender has to take on.
- Proof of assets like cash or retirement savings. This also helps to safeguard the lender in the event of a default.
- A low debt-to-income (DTI) ratio. As a general rule of thumb, your DTI shouldn’t exceed 43%, but lower is better.
- A strong income and employment history. Lenders like to see that you’ve worked in the same field and for the same employer for at least a couple of years.
How to improve your score before applying for a mortgage
If your credit isn’t where you’d like it to see it for the lowest interest rates and best terms, you have a few tactics to improve it before you apply for a mortgage:
- Monitor your credit report. Keeping a close eye on your credit helps you more easily and quickly spot errors and gauge whether you’re heading in the right direction.
- Save up for a large down payment. If your credit score is less than perfect, putting more money down can trim your loan amount, ultimately saving you unnecessary interest.
- Hold off on other credit. Each time a potential lender runs your credit report, your credit score dips. Wait until your mortgage is approved before applying for your next credit card or loan.
- Lower your credit utilization ratio. Pay off as much debt as you can to lower your debt-to-income ratio and ultimately improve your score.
- Pay your bills on time. To assure future creditors that you’ll repay what you borrow, build a history of on-time payments.
- Hire a credit repair service. If you’re feeling stuck, call in professionals to get back on your feet.
Start your credit repair journey with these services
Your credit score plays a key role in a lender’s decision to approve you for a mortgage loan. Before you submit your next mortgage application, know your credit score and working on ways to improve it for the strongest interest rates and repayment terms you’re eligible for.
Frequently asked questions
Who can use FHA mortgages?
First-time and experienced homebuyers can take advantage of an FHA loan’s 3.5% down payment option and lenient loan requirements. The only stipulation is that cannot carry more than one FHA loan at any time.
How do student loans affect your credit score?
Student loans affect your credit score, but indirectly. Open student loans shouldn’t affect your credit rating, because they’re typically treated as installment plans. But missing or late payments on those loans can hurt your credit score.
How long does it take bad credit to clear from your report?
Seven years, in most cases. Negative items tend to fall away from your credit report after seven years. But it doesn’t mean your debt disappears — you’ll still owe what you borrowed.
How fast can I increase my credit score?
Expect at least three months for changes to show up on your report. However, many credit score improvements take longer to reflect on your report.
One of the speediest ways to boost your score is to ask a trusted loved one to add you as an authorized user on their account.