Minimum Credit Score to Buy a House in 2021, Based on Loan Data

Credit score house concept

We reviewed home loan data provided by ICE Mortgage Technology to determine the minimum credit score needed to buy a house in 2021.

As it turns out, most mortgage loans these days are going to borrowers with FICO credit scores of 600 or higher. Having a 650 or higher could significantly increase your chances of loan approval.

If your credit score falls below 600, you might want to consider the FHA loan program as a backup.

(Note: These findings are based on the FICO scoring range in particular, which extends from 300 to 850. FICO scores are widely used by mortgage lenders in the U.S.)

Credit Score Needed to Buy a House in 2021

Each month, ICE Mortgage Technology (formerly known as Ellie Mae) publishes an “Origination Insight Report” that reveals data and trends across the mortgage lending industry. This company creates mortgage processing software platforms that are used by lenders across the U.S.

Their insight reports analyze “application data from a robust sampling
of approximately 80 percent of all mortgage applications” processed through their platform.

In other words, these reports give us a snapshot of current trends and standards across the mortgage industry.

They also help us answer common questions, such as: What minimum credit score is needed to buy a house in 2021?

The company’s latest report, which contained application data through the month of December 2020, revealed the following trends for purchase loans used to buy homes:

  • Nearly all purchase mortgages (99.75%) went to home buyers with credit scores of 600 or higher.
  • A much smaller slice (0.24%) of the total went to borrowers with scores that fell within the 550 – 599 range.
  • And there was virtually no lending activity below the 550 threshold.

So right away, we can draw some pretty clear conclusions. Based on these latest trends, it seems that a minimum credit score of 600 is needed to buy a house with a mortgage loan — at least in most cases.

If your score falls within the 550 – 599 range, you might still qualify for a mortgage loan. But you’ll probably have to shop around a lot more than a person with a higher score. You might also have to resort to using an FHA loan, as mentioned below.

Lastly, if your credit score falls below 550, the odds appear to be against you. According to the most recent insight report, only 0.01% of purchase mortgage loans had a credit score within the 500 – 549 range.

Note: None of this is “set in stone.” Different lenders have different standards and requirements, when it comes to screening borrowers. So don’t hesitate to shop around, even if you fall short of these trends.

Differences Between FHA and Conventional Loans

This report also illustrated some key differences between FHA and conventional mortgage loans, with regard to credit score distribution. The FHA program appears to be more flexible and has a higher percentage of borrowers with relatively low scores.

We’ll get to those numbers in a moment. First, a quick review of mortgage lingo:

  • A conventional mortgage loan is one that is not insured or guaranteed by the government. It receives no government backing of any kind. You might think of it as a “regular” home loan.
  • An FHA mortgage loan, in contrast, does receive insurance backing from the federal government. This insurance protects the lender against losses that can occur when a borrower fails to repay the debt.

Government-provided insurance is what distinguishes FHA and conventional loans. It also affects the minimum credit score needed to buy a home. Generally speaking, FHA loans are easier to obtain due to the government backing. Conventional loans, on the other hand, usually have higher standards.

Which leads us to the next question: What credit score is needed to buy a house in 2021, when using an FHA loan?

What Score Is Needed for an FHA-Insured Home Loan?

Based on the origination insight report mentioned above, it seems that a credit score of 550 or higher is needed to qualify for an FHA loan these days.

That’s different from the official minimum score required by the Federal Housing Administration. The official FHA guidelines (found within HUD Handbook 4000.1) state that a borrower needs a credit score of at least 500 to qualify for the program. A score of 580 or higher is needed to take advantage of the relatively low 3.5% down payment option.

But the Ellie Mae / ICE report showed that very few FHA home loans are going to borrowers with scores below 550. That’s because mortgage lenders can determine their own qualification criteria, even when participating in a government-backed program. And lenders tend to set the bar higher.

Regarding FHA loans, the latest insight report showed that 98.64% of FHA purchase loans went to borrowers with FICO credit scores of 600 or higher. Another 1.24% of mortgage applicants fell within the 550 – 599 range. And only 0.11% had scores below 550.

Here’s the key distinction between FHA and conventional:

  • With conventional / non-government mortgage loans, there’s hardly any lending activity within the 550 – 599 credit score range (0.03%).
  • With FHA-insured home loans, there was a higher level of activity among borrowers within that same range (1.24%).

The bottom line here is that mortgage lenders clearly want to see higher scores among FHA borrowers, compared to the official program cutoff of 500. Having a credit score in the low-500 range might check a box with the Federal Housing Administration. But that doesn’t mean you’ll pass muster with mortgage lenders.

Related: Average down payment size in 2021

A Small Part of a Bigger Picture

Credit scores are an important part of the mortgage qualification process. Having a good score can help you qualify for a home loan with a competitive interest rate.

That’s a big deal, from a borrower’s perspective.

But there’s a bigger picture here as well. Yes, there is a certain credit score needed to buy a home in 2021, and we’ve covered that above (as much as possible). Just bear in mind there are other qualification “checkpoints” you’ll have to clear.

For example, borrowers must also have a manageable level of debt in the lender’s view. The debt-to-income ratio, as it’s known, is a key part of the mortgage application and underwriting process. Also, borrowers must be able to document their income and earnings — and it must be sufficient to cover the monthly payments and other debts.

While credit scores do matter within the mortgage world, they are part of a broader review process that also includes debts, income and assets.

Disclaimer: This report provides an analysis of current lending trends based on third-party data. It is not meant to be the “final word” in lending standards and requirements. Nothing in this article should discourage you from applying for a home loan or speaking with a lender. That’s the only way to find out where you stand, in terms of your qualifications.