When it comes to credit score requirements for landing a mortgage, there are a variety of factors at play — like the type of mortgage you’re applying for and your specific lender requirements. If you’re in the market for a mortgage, this information can help you understand the ballpark number you may want to shoot for.
Types of Mortgages
There are several different types of mortgages to choose from, depending on where you want to live and what your financial situation is, and each comes with its own set of qualifications.
FHA loans are insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). These types of loans tend to have lower down payment and credit score requirements, as well as lower closing costs. They are also subject to different loan limits, depending on the county in which the home is being purchased. (See FHA loan limits in your area.)
HUD sets the minimum credit score requirements for FHA loans and, for 2020, those minimums are 580 or 500 with at least a 10% down payment. However, what lenders require may be higher — this is simply the lowest credit score you can have for HUD to consider insuring the loan.
VA loans are offered by private lenders but backed by the U.S. Department of Veteran’s Affairs. In order to be approved for a VA loan you generally must be an active duty member of the military, an honorably discharged veteran, have served at least six years in the National Guard or Selective Reserve, or be the spouse of a member of the military who died while on active duty. That is not a comprehensive list, however — more information about eligibility can be found here.
While the U.S. Department of Veteran’s Affairs does not explicitly have a minimum credit score requirement, individual lenders likely do. According to NerdWallet, this generally falls between 580 and 660.
USDA loans are backed by the United States Department of Agriculture and are available to qualified home buyers looking to purchase a home within an eligible rural or suburban area. (You can learn more about which areas qualify here.) The USDA loan program is intended to improve the quality of life in rural areas for those in need, so certain income requirements also apply.
While the USDA does not have a set credit score requirement, borrowers generally must have a credit score of 640 or above to receive approval through their automated underwriting system. You may still qualify with a credit score below 640, however your lender would likely have to manually underwrite your loan.
Unlike the previous loans we’ve talked about, conventional loans aren’t backed by the government — but they usually follow the guidelines set forth by Fannie Mae and Freddie Mac, both government-sponsored agencies. This can sometimes mean the credit score requirements will be higher for a conventional loan, in comparison to government-backed loans.
According to NerdWallet, lenders generally require a credit score of at least 620-640 to be approved for a conventional loan — although, again, it usually depends primarily on the lender.
Jumbo loans exceed the loan limits established by the Federal Housing Finance Agency and are therefore not backed by Fannie Mae and Freddie Mac. Loan limits can change based on home prices, but they currently sit at $510,400 in most markets and up to $765,600 in high-cost markets. If you need financing outside of the limit for the area in which you’re purchasing, you may need to find a private lender offering this type of loan. Generally considered high-risk, jumbo loans tend to come with stricter lending requirements and higher costs.
According to Experian, many lenders require a credit score of 720 or higher for a jumbo loan, and many won’t go below 660.
Other Financial Factors at Play
The credit score your lender may require doesn’t just depend on the type of loan you’re applying for. In fact, their credit score requirements may change based on other financial factors.
- Down Payment
The greater your down payment, the less you will need to finance and the less risky you may seem to lenders. For instance, as mentioned earlier, FHA loans generally require at least a 580 credit score — but could allow for as low as 500 if you put at least 10% down.
- Debt-to-Income ratio
The amount of debt you carry compared to your income can indicate to lenders whether or not you will have trouble making your monthly mortgage payments. Generally lenders want this number to be at or below 43%.
- Employment and Income
According to CNBC, given the current economy under COVID-19, many lenders are placing more emphasis on your current employment status and how reliable your job is going forward.
That brings us to another important factor…
COVID-19 and the Current Mortgage Market
Mortgage rates may be at all time lows, but that doesn’t mean everyone will find it easy to land a new mortgage. That’s because some lenders are tightening lending standards in response to concerns borrowers may have a harder time repaying their mortgages.
According to Bankrate, some lenders are requiring higher credit scores and higher down payments in order to qualify for a new loan. For instance, JPMorgan Chase has started requiring a credit score of at least 700 and has increased their down payment requirement from 3.5% to 20%. Wells Fargo and Bank of America now require a minimum credit score of 680 — even for FHA and VA loans.
Not all lenders are suspending lending to borrowers with lower credit scores, but you may need to do more digging than normal to find a lender who will.
How Does Your Credit Score Impact Your Payment Amount?
While a borrower with a credit score of 660 and a borrower with a credit score of 800 may both get approved for a mortgage, there will likely be a sizable difference in what they pay for their home over time. That’s because a credit score doesn’t just help determine whether you’ll be approved or denied a loan, it can help determine your interest rate as well.
Let’s take a look at what this could mean, based on calculations from FICO:
Down Payment: 20%
- Credit score: 760-850
- Interest rate: 2.914%
- Monthly payment: $2,085
- Total interest paid: $250,564
- Credit score: 700-759
- Interest rate: 3.136%
- Monthly payment: $2,145
- Total interest paid: $272,154
- Credit score: 680-699
- Interest rate: 3.313%
- Monthly payment: $2,193
- Total interest paid: $289,609
- Credit score: 660-679
- Interest rate: 3.527%
- Monthly payment: $2,253
- Total interest paid: $310,996
- Credit score: 640-659
- Interest rate: 3.957%
- Monthly payment: $2,375
- Total interest paid: $354,891
- Credit score: 620-639
- Interest rate: 4.503%
- Monthly payment: $2,534
- Total interest paid: $412,354
The monthly payment for the highest and lowest credit score ranges is $2,085 versus $2,534. The interest paid over time for the highest and lowest credit score ranges is $250,564 versus $412,354.
Clearly, credit scores can make a world of difference.
Get Your Credit Ready for a Mortgage
Thinking it might be time to make a move? Then you may want to put in the work to get your credit score mortgage-ready.
You can begin by checking each of your credit reports — you have three total, one from each of the three Credit Reporting Agencies (CRAs) — at AnnualCreditReport.com. Between now and April 2021, you are entitled to one free credit report weekly from each CRA — Experian, Equifax, and TransUnion.
Find out how to read your credit report and go to work disputing any errors you may find. An account with Upturn will allow you to check your TransUnion report and credit score AND help you dispute any errors for free. [Sign up here.]
Get even more information about credit reports and scores with our comprehensive guide.