One of the most important inputs in the mortgage process is your credit score so it is very important that you know your score before you start. In short, your credit score provides an indication of how likely you are to pay back your mortgage and lenders use it to determine how much money they are willing to lend you and the cost to you for borrowing that money, which is the interest rate you pay.
If you have a higher credit score lenders are more willing to lend you money and charge you their lowest interest rate. A lower credit score means that lenders may be less willing to lend you money and charge you a higher interest rate if they do. In many cases a borrower has enough income to afford a monthly mortgage payment but they cannot qualify for a mortgage due to a poor credit score or problematic credit history.
The charts below show credit score ranking bands and how your score potentially affects your mortgage rate. In short, for a conventional loan, the higher your credit score, the lower your rate, and vice versa. Simply put, borrowers with higher credit scores can save money on their loan, qualify for a higher mortgage amount and may be eligible for more loan programs. The charts below are examples and loan terms, including interest rates, vary depending on your individual circumstances.
The higher your score, the better your credit
The lower your score, the higher the interest rate
We should highlight that the charts above apply to conventional mortgages, or loans that are not insured by the government. For government-backed programs such as FHA, VA, USDA and Section 184 loans, your mortgage rate should not change based on your credit score. For example, an applicant with a 680 credit score should pay the same rate as an applicant with a 780 credit score. This is one reason why these programs are good for borrowers with lower scores or credit challenges.
The table below compares interest rates and fees for borrowers with good or better credit profiles. We recommend that you contact multiple lenders to understand how your specific credit score affects your individual loan terms, what size mortgage you can afford and the loan programs you are eligible for. Comparing lenders is important because qualification guidelines, including minimum credit scores, and mortgage program availability vary. Plus, shopping for your mortgage enables you to find the best loan terms.
The credit score required for a mortgage depends on many factors, including your down payment and loan-to-value (LTV) ratio, loan amount and mortgage program. According to industry guidelines, a minimum credit score of 620 is required to qualify for a standard conventional mortgage, although as we outline below, it is possible to qualify for certain loan programs with a lower score. We should also note that some lenders apply a higher minimum score requirement -- which is known as a lender overlay -- that exceeds these guidelines. It is important to highlight that you typically need a credit score of 700 to 740 to qualify for a lender's best loan terms, including their lowest mortgage rate.
Perhaps that biggest factor that determines the credit score required for a mortgage is the loan program you choose. The table below outlines the credit score required for some of the more popular conventional and government-backed mortgage programs. As presented in the table, some programs enable you to qualify with a credit score as low as 500 while other programs requires no score at all. Many of these programs also require little or no down payment which makes it easier to qualify for a mortgage and buy a home. Click on the program title to review more detailed information about each one.
Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including multiple options for credit-challenged borrowers.
In addition to your credit score, serious credit events may impact your ability to qualify for a mortgage. If you have experienced a serious credit issue such as a bankruptcy, short sale, default or foreclosure, most lenders impose waiting periods before you can apply for a mortgage. For example, if you experienced a short sale you may not be able to qualify for a mortgage for two years and if you experienced a foreclosure you may not be able to qualify for a mortgage for seven years. The waiting periods are different depending on the credit event and are shorter if an extenuating circumstance such as a job loss or medical illness contributed to the event. The waiting periods also vary depending on mortgage program with conventional (non-government backed) mortgages requiring longer waiting periods than government-backed programs such as the FHA and VA mortgage programs. We provide a comprehensive discussion of the waiting periods following negative credit events before you can apply for a mortgage.
When you apply for a mortgage, lenders typically pull your credit report from the three main credit bureaus: Equifax, Experian and TransUnion. Lenders review a borrower's credit reports and scores from all three bureaus and typically use the middle score to determine your ability to qualify for a mortgage as well as loan pricing (e.g., what interest rate you pay). For example, if your Equifax credit score is 640, your Experian credit score is 660 and your TransUnion credit score is 740, the lender will use the Experian score of 660 to assess your application. If you only have two credit scores, the lender uses the lower score to evaluate your application and determine your mortgage terms.
The three bureaus use relatively similar scoring methodologies -- making your payments on-time, maintaining low credit utilization and limiting the number of credit accounts you have open leads to higher scores for all three. Despite using similar methodologies, there may be differences across your three credit scores and reports that could affect your ability to get approved for a mortgage. For example, one bureau may report a collection on your credit report that the other two bureaus do not report. Given these potential differences, it is important that borrowers understand their scores for all three bureaus.
To identify any significant discrepancies, we recommend that borrowers review their credit reports from all three bureaus before applying for a mortgage
It is important to understand the credit score required for a mortgage when two people apply as co-borrowers. If you apply for a mortgage with another applicant, the lender uses the average median credit score for the borrowers to determine the credit-worthiness of the applicants.
If both borrowers have three credit scores, the lender averages their middle scores to determine the score used for their loan application. For example, if one borrowers has scores of 640, 680 and 700 and the other borrower has scores of 700, 740 and 780, the lender uses the average of 680 and 740 -- which is 710 -- to determine their ability to qualify for the mortgage and to set their loan terms.
If a borrower only has two scores, the lender uses the lower score to calculate the average. For example, if your credit score is 760 and 800 and your co-applicant's scores are 640 and 680, the lender the lender averages 780 and 640 -- which is 700.
If two people are applying for a mortgage and one individual has a good credit score and the other individual has a poor credit score, it may make sense to only have the individual with the good credit score apply for the mortgage. If you decide to only have one person apply for a mortgage it is important that you can qualify for the mortgage with only that person's income and you do not need both individuals' incomes to afford the loan you want. You can add the second individual to the property title after the mortgage closes although the actual mortgage will always remain in the name of the individual who applied for the loan unless you refinance the mortgage and have both individuals jointly apply for and receive the new loan.
We recommend that you review your credit score six months to a year before you start the mortgage process. This helps you avoid negative surprises and allows you to address potential issues with your credit report in advance of applying for a mortgage. By reviewing your credit score months before you apply for a mortgage you can take positive steps to improve your credit profile such as addressing unknown bill mix-ups and late payments or potentially reducing your credit card balances. Your credit score may continue to be impacted by past negative credit events, such as a late payment or charge-off, for several months so the sooner you identify and address any issues the better. Additionally, it can take one-to-two months for your credit score to reflect positive credit actions, such as paying down credit card debt or closing accounts.
A common question is does it hurt my credit score when I check my credit score multiple times and the answer is no. Checking your own credit score is known as a soft inquiry and although this type of inquiry is recorded on your credit report, it does not lower your credit score. You can use free services such as AnnualCreditReport.com, CreditKarma or credit.com to check your credit score on a weekly or monthly basis without lowering your credit score.
Being proactive about your credit profile helps you qualify for your mortgage and receive the lowest possible interest rate
Please note that when you apply for a mortgage, or in some cases apply to get pre-approved for a mortgage, lenders will pull your full credit report. This counts as a hard inquiry and may have a moderately negative effect on your credit score if done repeatedly over several months. When multiple lenders pull your credit score within a specified time period; however, this only counts as one event so the borrower is not penalized for getting pre-approved or comparing multiple lenders when shopping for a mortgage.
Use our get pre-approved form to get approved and review mortgage terms from leading lenders in your area. Getting pre-approved is free, no obligation and enables you to identify potential issues with your credit profile.
Borrowers with limited credit histories, such as no credit cards, auto or student loans, may not have a credit score which makes getting a mortgage challenging but not impossible. Borrowers without a score can qualify for a mortgage by providing two items that establish their credit history over the past twelve months. One of the items is usually a rental payment history and the other item can be a monthly bill for a cell phone, gym membership or utility.
Getting a mortgage with no credit score comes at an additional cost to borrowers. For a conventional loan, no score borrowers typically receive the same interest rate as borrowers with the lowest score required to qualify for a mortgage. This means borrowers without a credit score may pay an interest rate that is .5% - 1.5% higher than borrowers with good or excellent credit scores, and potentially higher depending on the mortgage program.
To qualify for a no credit score mortgage, borrowers must make a down payment of at least 10% although the down payment can come from a gift. Please note that if you make a down payment of less than 20% you are required to pay private mortgage insurance (PMI) which is an additional ongoing cost on top of your monthly mortgage payment.
The loan amount for a no credit score mortgage must be less than the conforming loan limit for your county. Additionally, the program only applies to single unit primary residences so multifamily and investment property are not eligible. No credit score mortgages are available for home purchases and no cash-out refinances.
Borrowers with no credit scores or limited credit histories should consider the FHA, VA, USDA, HomeReady or NACA programs which either do not require a credit score or allow the use of non-traditional credit profiles to qualify for a mortgage. These programs require additional documentation from both the applicant and lender but are usually better financing options for borrowers in this category.
Most lenders perform a second credit check prior to your mortgage closing, before you reach the "clear to close" stage of the mortgage process. "Clear to close" means that you have satisfied all conditions required for your mortgage to close. This secondary check is done using "soft inquiry" so it should not affect your credit score. Lenders check your credit prior to closing to determine if there have been significant changes in your credit profile since you applied for the mortgage.
If you opened several new loan accounts, that can hurt your credit score or debt-to-income ratio. If you incur too much new debt, your credit score declined significantly or your monthly debt expenses increased compared to when you applied for the mortgage, the lender may determine that you no longer qualify for the loan and the lender may decide to cancel the loan. Lenders are focused on borrowers whose credit profiles have changed significantly such as if you take out a new car loan, apply for multiple new debt accounts or increase your credit card balance by making major purchases. This outcome not common and is presented as a worst case scenario.
Borrowers should avoid applying for new loan accounts or taking on significant new debt until after their mortgage closes. Please note that If the lender intends to check your credit prior to closing, the additional credit check should be listed as a condition to close but unfortunately that is not always the case.
As of September 2016, Fannie Mae implemented the use of trended credit data as an additional factor to determine if an applicant qualifies for a mortgage. In short, Fannie Mae is a government-sponsored enterprise that provides mortgage capital to lenders. Although the policies and practices used by Fannie Mae do not apply to all lenders or applicants, they have significant influence on borrower qualification guidelines across the mortgage industry.
Trended credit report data contains monthly information on how a borrower has managed their credit and paid their bills over the prior twenty-four months as compared to a traditional credit report that only contains current information on a borrower's account balances, credit availability and on-time payment history. For example, trended credit data shows if borrowers have made the minimum monthly payment, paid more than the minimum payment or consistently paid off their credit card balances over the prior two years.
Trended credit data provides lenders with additional and more detailed information that they can use as an added input to determine if an applicant qualifies for a mortgage. For example, analysis shows that borrowers who consistently pay more than the minimum monthly payment or who regularly pay-off their credit card bills are significantly less likely to default on their mortgage. With these borrowers, trended credit data provides more relevant information to inform the lender decision-making process than a standard credit report which only offers a snap-shot of a borrower's credit profile at a given point in time.
It is important to highlight that trended credit data does not replace your credit score and your credit score remains one of the most important factors in determining your mortgage rate. Trended credit data that demonstrates an applicant's ability to consistently repay debt over time, however, may enable more applicants with mid-to-low credit scores to qualify for a mortgage. The use of trended credit data in the mortgage process should also motivate borrowers to consistently make more than the minimum payment on their credit card bills, which also saves them money on interest expense.
Applicants should ask lenders if it will be used in the mortgage qualification process and understand if the use of trended credit data helps or hurts their ability to qualify for a loan.
"Selling Guide Announcement, Credit Score Eligibility in DU." SEL LL-2021-08. Fannie Mae, September 1 2021. Web.
"B3-5.1-01, General Requirements for Credit Scores." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
"II.A.1.b.ii.(A).(3) Borrower Minimum Decision Credit Score." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
"Chapter 4. Credit Underwriting." Lenders Handbook - VA Pamphlet 26-7. U.S. Department of Veterans Affairs, 2020. Web.
"Chapter 10: Credit Analysis." Single Family Housing Guaranteed Loan Program Technical Handbook. U.S. Department of Agriculture, 2020. Web.About the author