What is the Minimum Credit Score for Mortgage Approval?
Reader question: "Can you tell me the minimum credit score for mortgage approval in the current economy? I know a lot has changed over the last few years, but I can't seem to find a straight answer on this one. I've seen quite a range of number actually."
The reason you can't get a straight answer to this question is because there isn't one. It depends on the type of loan you choose, the lender you use, and how well you qualify in other areas.
With that being said, most lenders want to see a minimum credit score of 620 for a conventional mortgage loan. I'll go into the details later. But first, we need to cover some basic definitions:
- FICO Score -- There are different types of credit scores, but the one you need to be concerned with is your FICO number. This acronym comes from the original name of the company that created the credit-scoring model (Fair Isaac Corporation). Your FICO credit score is the one that most mortgage lenders review when considering you for a loan. So it's the one you should care about the most. When I refer to your minimum credit score in this article, I'm talking about this three-digit number in particular.
- Conventional Mortgage -- This is another term you should be familiar with. A conventional loan is one that is made entirely in the private sector. It does not have any form of government backing or insurance.
- FHA Loan -- Unlike a conventional mortgage, this type of home loan is insured by the federal government. This insurance protects the lender from losses resulting from borrower default. You still have to apply for this type of loan through a regular lender. It just has the added "feature" of federal backing. This program is open to all home buyers, but it's particularly popular among first-time buyers.
These are the three most important terms to keep in mind, as we discuss the minimum credit score for mortgage approval. If you can keep these three concepts straight, everything else will make a lot more sense.
FICO 640: The Magic Number for Mortgage Approval?
Note: Your credit score is not the only criteria for home loan approval. Lenders will also consider (A) the amount of money you earn in relation to your debts, (B) the size of your down payment, and (C) your ability to cover your closing costs. Your employment history will be scrutinized as well.
If your credit score is slightly below the lender's minimum requirement, you might still get approved for a mortgage. They look at the big picture. Exceptions can be made during the underwriting process. So when I talk about the minimum credit score for mortgage approval, I'm speaking in general terms. Don't take it as gospel.
In the beginning of this article, I said you would probably need a minimum score of 620 for a mortgage loan. This number has been the traditional cut-off point for many years. But in 2010 - 2011, a lot of lenders have increased their minimum FICO requirement to 640. This is for a conventional loan, which does not receive any form of government backing.
If you use a government-insured FHA loan to buy a house, you might be able to qualify with a score below 620.
And remember, there are exceptions to every rule. A borrower with a FICO score of 615 (who also has a large down payment and very little debt) might still get approved for a loan. But a borrower with a score of 640 and a mountain of debt might get rejected.
FHA Minimum: 500 or Higher
We went over the definition of an FHA home loan earlier. You'll recall that it's a mortgage loan that gets insured by the federal government. If you use this program to buy a house, you might be able to get approved with a score below the 620 cut-off that's required on most conventional mortgage loans.
Technically speaking, the minimum credit score for an FHA mortgage loan is 500. But that's just to qualify for financing. If you want to take advantage of the 3.5 percent down-payment option (which is the biggest benefit of FHA loans), you'll need a score of 580 or higher. These guidelines were put in place in 2010, and they still applied as of June 2011.
But there's one problem with these minimum score requirements. The lender you apply with might have stricter requirements than the FHA. This is fairly common, actually. The industry term for this is an "overlay." Some lenders impose their own mortgage requirements on top of the FHA's guidelines. So while the government says you can qualify for the program with a FICO score of 500 or above, the lender might require borrowers to have a 640 or higher.
You can learn more about FHA overlays in this article.
It Takes a Higher Credit Score to Get the Best Rates
There's a difference between (A) qualifying for a home loan and (B) getting the best rates on that loan. You might be able to get a mortgage with a minimum score of 640 or so. But you won't qualify for the lender's lowest interest rates at that level. You'd need a credit score of 740 or higher to get the best rate available.
Of course, you could always pay points to get a lower rate. But that's another article entirely. Click the link provided if you want to learn more about that strategy.
I'd like to reiterate that my comments are by no means set in stone. The only way to know if you have the minimum credit score needed for a mortgage loan is to apply for one. Only a lender can tell you whether or not you meet their standards. Anyone else who talks about this subject (including myself) is offering an educated guess. So don't take it as gospel.