There is no universal credit score for a mortgage, says Mat Ishbia, CEO and president of United Wholesale Mortgage. The minimum credit score for a mortgage will depend on the type of loan – conventional or government-backed – and the lender.
Unlike a conventional loan, a government-backed loan is insured by the federal government, which protects the lender if you default on your home loan. This guarantee makes qualifying for a government-backed loan easier than a conventional loan.
“While lenders differ, most require a 620 score, and 580 seems to be the floor for most situations,” Ishbia says.
You can buy a home with a FICO score of about 600, but you will be limited to mortgage programs for lower credit scores. Choices might include a Federal Housing Administration loan that requires a score of either 580 or 500, depending on your down payment, and Department of Veterans Affairs or U.S. Department of Agriculture loans, which set no firm minimum.
Whether you opt for a conventional or government-backed mortgage, you can expect stricter minimum credit score requirements as lenders respond to economic uncertainty caused by the pandemic. If your credit doesn’t meet the minimum requirements, you may be asked to make a larger down payment.
Income verification is also more intense for borrowers.
If you’re in the market for a mortgage, this table shows the minimum credit score required for FHA, VA, USDA and conventional loans.
Why Do Credit Scores Matter for Home Loans?
There’s a simple reason that lenders evaluate your credit history, including your credit score, when you’re trying to buy a home.
“Credit scores are an indication of risk,” Ishbia says. “In the eyes of most lenders, a lower score means higher risk.”
It won’t be a roadblock to approval, but it often means paying more than if you had good credit.
Brunker says, “Generally, lenders view a credit score as a leading indicator of the borrower’s likelihood to repay the loan, and as a result, will ask a borrower with a lower credit score to pay a higher rate, all else being equal.”
Even a small difference in your interest rate can add up to thousands of dollars over time. A 30-year $250,000 loan at 4% interest results in paying $179,674 in total interest; a quarter of a percentage point more costs an extra $13,072 in total interest.
The higher interest rate translates to a higher monthly payment as well: You’d pay $1,194 at 4% and $1,230 at 4.25%.
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