What’s the minimum credit score for a home loan?
Buyers are often surprised at the range of low credit score home loans available today.
Most lenders will
issue government-backed FHA loans and VA loans starting at a 580 credit score. Some
even start as low as 500-579 (though these lenders are harder to find).
With a credit score above 600, your options open up even more. Low-rate conventional mortgages only require a 620 score to qualify. And with a credit score of 680 or higher, you could apply for just about any home loan.
So the question isn’t always “can I qualify for a mortgage?,” but rather “which one is best for me?”
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Compare low credit score home loans
Some mortgages are
specifically designed to help lower credit applicants get into homes. Here are
seven different options that may work for you:
|Mortgage Type||Minimum Credit Score||Recommended For|
|FHA Loan||500 (with 10% down)
580 (with 3.5% down)
|Borrowers with credit scores from 500-620|
|VA Loan||580 (can vary by lender)||Eligible veterans and servicemembers|
|USDA Loan||640||Buying a house in a rural area|
|Conventional Loans||620||Borrowers with moderate to good credit|
|Freddie Mac Home Possible||620||Low- to moderate-income borrowers|
|Fannie Mae HomeReady||620||Low- to moderate-income borrowers|
|Non-qualified (Non-QM) Mortgages||500-580||Borrowers who don’t qualify for a conventional or government-backed loan|
1. FHA mortgage: Minimum credit score 500
FHA loans — backed by the Federal Housing Administration —
are specifically designed for lower-credit borrowers.
Most lenders offer FHA loans starting at a 580 credit score.
If your score is 580 or higher, you only need to put 3.5% down.
For those with lower credit (500-579), it might still be
possible to get an FHA loan. But you’ll need to put at least 10% down, and it
can be harder to find lenders that allow a 500 minimum credit score.
Another appealing quality of an FHA loan is that, unlike conventional loans, FHA backed loans don’t carry “risk-based pricing”. This is also known as “loan-level pricing adjustments” (LLPA).
Risk-based pricing is a fee
assessed to applications with lower credit scores or other less-than-ideal
There may be some interest
rate “hits” for lower credit scores, but they tend to be significantly less
than for conventional loans.
For homeowners, this means
lower credit scores don’t necessarily come with higher interest rates.
2. VA mortgage: Minimum credit score 580
loans are popular mortgage loans offered to veterans, service members,
and some eligible spouses and military-affiliated people.
These loans do not require a
down payment, nor any mortgage insurance. They also typically have the
lowest interest rates on the market.
Technically, there’s no minimum credit score for a VA loan.
However, most lenders impose a minimum score of at least 580. And some start as
high as 620.
to FHA loans, though, VA loans don’t have risk-based pricing adjustments.
Applicants with low scores can get rates similar to those for high-credit
3. USDA home loan: Minimum
credit score 640
Many homeowners are drawn to
this third type of government loan thanks to its zero-down payment requirement.
Most lenders will require a
640 FICO score to qualify for a USDA loan, although some will go down to 580.
As with FHA and VA loans,
however, USDA homeowners with a 580 credit score will be more carefully
evaluated than those with a higher credit score.
4. Conventional loans: Minimum
credit score 620
mortgage loans require higher rates and fees for low credit scores.
Fannie Mae and Freddie Mac,
the agencies that administer most of the conventional loans in the U.S., charge
loan-level price adjustments, or LLPAs.
These fees are based
on two loan factors:
- Loan-to-value (LTV): the ratio between the loan
amount and home value
- Credit score
As LTV rises and credit score
falls, the fee goes up.
For instance, a borrower with
20% down and a 700 credit score will pay 1.25% of the loan amount in LLPAs.
An applicant with a 640 score
and ten percent down will be charged a fee of 2.75%.
The majority of lenders will
require homeowners to have a minimum credit score of 620 in order to qualify
for a conventional loan.
While conventional loans are available
to lower credit applicants, the fees could make FHA much cheaper for those with
credit scores on the low end of the spectrum.
5. Freddie Mac Home Possible: Minimum
credit score 620
Released in March 2015,
Freddie Mac’s first time home buyer program, Home Possible®, is helping buyers
get into homes at a very low down payment.
Home Possible® is available for low and moderate-income borrowers and allows for a down payment of just 3%.
To qualify for the Home Possible® loan with reduced PMI rates, most lenders will require a 620 or better credit score.
6. Fannie Mae HomeReady: Minimum credit score 620
Released in December 2015, HomeReady is a great Fannie Mae loan program for low- to moderate-income borrowers, with expanded eligibility for financing homes in low-income communities.
Unlike Freddie’s Home Possible program, you don’t have to be a first-time homebuyer to qualify for HomeReady.
In addition to the low down payment option of just 3%, one of the most appealing traits of the HomeReady program is that it allows non-borrower household member’s income, regardless of their credit scores.
Most lenders require a minimum of 620 in order to qualify for HomeReady.
7. Non-qualified mortgage (Non-QM): Minimum credit score 500-580
The qualified mortgage rule,
also known as the QM Rule, went into effect in 2014.
The requirements associated
with QM loans were set forth by the federal government, and were meant to
create safer loans by prohibiting or limiting certain high-risk mortgage
This rule is the reason most loans
require a minimum credit score in the 600s as well as a down payment and/or
But there are still some “non-QM”
loans available that have more flexible rules.
When banks don’t sell their mortgages to investors, they’re free to set their own requirements — like a lower credit score.
Thus, some non-QM loans can be found with credit scores as low as 500. But like with an FHA loan, you’re much more likely to find a lender who will approve you with a FICO score of 580 or higher.
If you’re looking for one of these loans, check out the specialty mortgage programs some banks offer that are neither conventional loans nor government-backed.
Or, work with a mortgage broker who
can recommend products from various lenders that might fit your needs.
What are today’s mortgage rates?
Even if you have a lower
credit score, you can still get a very low rate and payment in the current
interest rate market.
Check your eligibility for one
of today’s credit-friendly mortgage programs.
Compare top refinance lenders
Published at Fri, 11 Sep 2020 11:50:54 +0000