When it comes to getting a mortgage, having a good credit score is essential. A conventional loan requires a credit score of 620 or higher, while an FHA loan requires a score of 580 or higher. Private lenders may offer non-qualifying mortgages with even lower credit scores, but these loans come with higher interest rates. VA loans are available to veterans and military service members, and USDA loans are available to those with low incomes.
HomeReady loans require a credit score of 660 or higher, and Home Possible loans require a score of 580 or higher. A great credit score of 750 or higher is the best place to be when you're looking for a mortgage, but even if your credit score is lower, there are still options available. When applying for a mortgage, it's important to understand the requirements for each type of loan. Conventional loans require a credit score of 620 or higher, while FHA loans require a score of 580 or higher.
If your credit score is lower than 620, lenders may not be able to approve your loan or they may offer you a higher interest rate, resulting in higher monthly payments. With a credit score above 600, your options open up even more. FHA loans are popular for their zero down payment requirement and low rates. You generally need a FICO score of 640 to qualify for this type of mortgage, although minimum credit score requirements may vary by loan.
A USDA loan won't work if you make too much money either - your household income cannot exceed 115 percent of the median household income in your area. Low-scoring applicants can often get similar rates to high-credit borrowers with an FHA loan. Unlike conventional loans, FHA-backed mortgages have no risk-based pricing - also known as “loan-level price adjustments” (LLPA). As your loan-to-value (LTV) ratio increases and your credit rating decreases, your commission increases.
For example, a borrower with a down payment of 20% and a credit rating of 700 will pay 1.25% of the loan amount in LLPA, while an applicant with a score of 640 and a 10% down payment will be charged a 2.75 percent fee. VA loans are popular home loans offered only to veterans, military service members, and some eligible spouses and borrowers affiliated with the military. Supported by the Department of Veterans Affairs, these loans do not require a down payment or any ongoing mortgage insurance payment - although there is a one-time financing fee that most borrowers accrue on the loan amount. Like FHA loans, VA loans have no risk-based price adjustments. HomeReady requires only a 3% down payment and a 620 credit score, and Home Possible allows for a variety of down payment assistance programs with no direct correlation between lower credit scores and higher closing costs. But taking out a loan with bad credit does limit your borrowing options, which can increase loan costs. To qualify for the Home Possible loan with reduced PMI rates, most lenders will require a credit score of 660 or higher.
That's why you could still get an FHA loan even with a credit score below 580 - most lenders consider this high-risk. If prospective borrowers can even slightly improve their credit score to 580, they may even be allowed to borrow up to 96.5% of the original purchase price of their home. It may take some time, but with the help of a credit and housing counselor, you can learn what steps you should take to improve your credit score before taking out a mortgage loan.
