Monday, August 17, 2020 / by Teresa Dipeso
Credit scores typically range from 300 to 850, and borrowers within a certain range can qualify for mortgage loans. While you don’t need a perfect 850 credit score to get the best mortgage rates, there are general credit score requirements you will need to meet in order to take out a mortgage.
Prospective home buyers should aim to have credit scores of 760 or greater to qualify for the best interest rates on mortgages.
However, the minimum credit score requirements vary based on the type of loan you take out and who insures the loan. Of our list below, conventional and jumbo loans aren’t insured by the government and often have higher credit score requirements compared to government-backed loans, like VA loans.
Having a higher credit score makes a big difference in the amount of money you pay over the course of a loan. Borrowers with scores in the higher range can save thousands of dollars in interest payments over the life of a mortgage.
Here are the minimum credit score requirements for several mortgage loans, using estimates from FICO.
1. Conventional loan
Minimum credit score required: 620
Conventional mortgage loans aren’t insured by a government agency, like the U.S. Department of Veteran Affairs or the U.S. Department of Agriculture. Instead, these loans follow standards set by government-sponsored mortgage loan companies, Fannie Mae and Freddie Mac. Conventional loans may be secured by one of these companies or a private lender. These loans are more affordable and require a minimum 620 credit score. Down payment amounts vary.
Conventional loans are divided into conforming or non-conforming loans based on whether they “conform” or follow lending rules set by Fannie Mae and Freddie Mac. Conforming loans follow the standards set by these organizations, such as maximum loan amounts, while non-conforming loans may exceed those limits and are considered “jumbo” loans, which we discuss the credit requirements for next.
2. Jumbo loan
Minimum credit score required: 680
A jumbo loan exceeds the maximum loan amount limits set by the Federal Housing Finance Agency. These loans aren’t eligible to be insured by Fannie Mae or Freddie Mac, which means lenders take on more risk in the case you default on payments. Due to the larger loan amounts and riskier nature of these loans, borrowers need to meet higher credit score requirements of at least 680. Like conforming conventional loans, down payments vary.
3. FHA loan
Minimum credit score required: 500 (with 10% down) or 580 (with 3.5% down)
An FHA loan is insured by the Federal Housing Administration and an option for borrowers who are deemed a higher risk due to low credit scores and little money to put toward a down payment. The credit score requirements differ based on how much money you plan to put down. Borrowers with higher credit scores can qualify to make a lower down payment.
Here’s the breakdown:
- Minimum 500 credit score, needs 10% down payment
- Minimum 580 credit score, needs 3.5% down payment
Keep in mind that if you make a down payment less than 20%, lenders will probably require you to take out primary mortgage insurance (PMI) to cover the cost if you default. PMI can cost as low as 0.5% to upwards of 2% of your loan amount annually, according to Experian.
4. VA loan
Minimum credit score required: None officially, though many lenders prefer 620
A VA (Veteran Affairs) loan is insured by the U.S. Department of Veteran Affairs and designed for eligible members of the military community and their spouses. This type of loan doesn’t require a down payment. And while the VA doesn’t set credit score requirements, most lenders will require a minimum 620 credit score.
5. USDA loan
Minimum credit score required: None officially, though most lenders prefer 640
A USDA loan is insured by the U.S. Department of Agriculture and meant for low- to moderate-income home buyers. Similar to a VA loan, the USDA doesn’t require a down payment and doesn’t set a minimum credit score requirement. However, most lenders will require borrowers to have a 640 or greater credit score.