Credit Score Required for a Mortgage
- Credit Score Overview
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 the process. In short, your credit score provides an indication of how likely you are to pay back your mortgage and lenders focus on it when determining how much money they are willing to lend you and the cost to you for borrowing that money (the interest rate). A higher credit score means that lenders will be more willing to lend you money and charge you their lowest interest rate. A lower credit score means that lenders will 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 credit history.
The charts below show you the credit score required for a mortgage, how your score ranks and how your credit score affects your mortgage rate. In short, the higher your credit score, the lower your mortgage rate, and vice versa. Simply put, borrowers with higher credit scores save money on their loan, can qualify for a higher mortgage amount and are eligible for more loan programs. The charts below are examples. To get updated mortgage rates click MORTGAGE RATES
- What Credit Score Is Required for a Mortgage?
- Review our Mortgage Expert Insights on How to Get a Mortgage with Bad Credit
- Review our Mortgage Expert Insights on How to Improve Your Credit Score Before Applying for a Mortgage
- When Should I Check My Credit Score Before Applying for a Mortgage?
- Being proactive about your credit profile will help you avoid negative surprises later in the mortgage process, qualify for a mortgage and receive the lowest possible interest rate. That is why FREEandCLEAR emphasizes understanding your credit score six months to a year before you start the mortgage process.
- You do not have to pay for your credit score. Use free services such as AnnualCreditReport.com, CreditKarma or credit.com to check and monitor your credit score for free.
- Trended Credit Data
- How Do Lenders Treat Different Credit Scores?
- To identify any significant discrepancies and avoid negative surprises, FREEandCLEAR recommends that borrowers review their credit scores and reports from all three bureaus before applying for a mortgage.
- How Lenders Treat Credit Scores for Co-Borrowers
- Second Credit Check Before Your Mortgage Closes
- Getting a Mortgage With No Credit Score
There are multiple factors that determine the credit score required for a mortgage, including your down payment amount and loan-to-value (LTV) ratio, but lenders typically require that borrowers have a minimum credit score in the mid 600s to qualify for a mortgage although it may be possible to qualify for certain loan programs with a lower score. Additionally, borrowers with a minimum credit score of 680 - 700 typically receive a lender's lowest mortgage rate.
If you have a lower credit score it does not mean you cannot get a mortgage. There are multiple conventional and government-backed mortgage programs for borrowers with lower credit scores and most of these programs have lower down payment requirements as well. For example, the Fannie Mae HomeReady Mortgage Program is available to qualified borrowers with a minimum credit score of 620 (or no traditional credit score at all) and the FHA Home Loan Program is available to borrowers with a minimum credit score of 580 if you make a down payment of 3.5% or a credit score as low as 500 if you make at a down payment of at least 10%. The NACA Mortgage Program does not require a credit score and instead uses a character-based borrower credit profile evaluation.
Both the HomeReady Mortgage Program and the FHA Home Loan Program require borrowers to pay additional mortgage insurance fees on top of their monthly mortgage payment but the NACA Mortgage Program does not. Many but not all mortgage programs for borrowers with lower credit scores also charge a higher interest rate with the FHA Mortgage Program being a notable exception by charging a lower interest rate. We provide a comprehensive comparison of mortgage programs for borrowers with lower credit scores including eligibility requirements, extra costs and interest rates. Additionally, there are alternative mortgage programs for borrowers with much lower credit scores or severely impaired credit profiles.
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.
We recommend that you review your credit score six months to a year before you start the mortgage process. This will help you avoid negative surprises and allow 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 a minimum of twelve 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.
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.
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.
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.
Because the use of trended credit report data was implemented relatively recently, 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.
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. 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.
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 a spouse or partner, the lender uses the lowest credit score among the borrowers to determine the credit-worthiness of the applicants. For example, if your credit score is 780 and your co-applicant's score is 640, the lender uses the 640 score to evaluate your loan application and to determine your mortgage rate.
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.
Many, but not all, lenders check your credit a second time 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. 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 incurred significant new debt or 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 significantly 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. This outcome not common and is presented as a worst case scenario. 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 loans or incur new credit card debt by making major purchases. 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.
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 must be 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. No score borrowers typically receive the same interest rate as borrowers with a 620 credit score, the lowest score required to qualify for a mortgage. This means borrowers without a credit score may pay an interest rate that is .5% - 1.0% higher than borrowers with good or excellent credit scores, and potentially higher depending on the mortgage program.
To qualify for the 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.
No credit score mortgage loan amounts 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 score should also explore the Fannie Mae HomeReady Program which considers alternate credit histories as well as the NACA Home Loan Program which does not require a credit score.