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What credit score do you need for a mortgage? Complete guide to credit for mortgages

Gina Pogol
Gina PogolThe Mortgage Reports Contributor

In this article:

What credit score do you need for a mortgage? It depends on the loan.

  1. Fannie Mae and Freddie Mac require at least 620, but only about 5 percent of approved loans have FICO scores that low.
  2. FHA allows a FICO of 580 with 3.5 percent down and 500 with 10 percent down. The majority of approved FHA borrowers have scored between 600 and 700.
  3. “Non-prime” loans allow scores down to 500 with large down payments and higher interest rates.

Note that many lenders choose to impose tougher minimum scores than required by the loan program. Those are called “overlays.” However, low credit mortgage lenders are emerging with new programs.

Verify your mortgage eligibility (Oct 21st, 2018)

What credit score do you need for a mortgage?

As a mortgage borrower in the United States, there is no shortage of mortgage loans available to you.

Loans backed by the Federal Housing Administration (FHA) and Fannie Mae and Freddie Mac allow down payments as low as 3.5 percent and three percent, respectively.

And, VA loans from the Department of Veterans Affairs and USDA-backed Rural Housing Loans both allow no money down.

In today’s housing market, the minimum FICOs are lenient.

  • Fannie Mae and Freddie Mac: 620 minimum FICO score
  • FHA loan: 500 minimum FICO score
  • VA loan: No minimum FICO score
  • USDA Rural Housing: In most cases, the minimum is 640

There’s more to know than just the minimums, of course (which is why underwriting guidelines comprise hundreds of pages). In addition to credit scores, lenders evaluate borrowers based on down payment, income, savings, and debt loads, too.

If that seems like a lot of information, that’s because it is.

Automated underwriting

It’s so much information that mortgage lenders use automated underwriting software (AUS) to make an approval recommendation.

In general, AUS findings work like this:

  • High credit scores with strong income, assets, and debt get approved
  • Low credit scores with weak income, assets, and debt get turned down

Applicants with mixed profiles are the least-predictable and most interesting.

If your credit scores are weak, but you have high, stable income; a large amount of savings, and a manageable load of debt, you’re likely to get an AUS approval.

Similarly, you’ll likely secure loan approval if your credit scores are strong but you’re average in the supporting zones.

You don’t have to be great in all areas to secure an approval. The key is to understand that lenders don’t treat “low credit scores” in the same way that they treat “bad credit.”

Verify your mortgage eligibility (Oct 21st, 2018)

Your FICO score doesn’t tell the whole story

620 is the minimum FICO score for a conforming (Fannie Mae or Freddie Mac) home loan, and that’s widely considered to be a below-average score.

However, a 620 score isn’t necessarily “bad.”

Low credit scores can happen for a lot of reasons. Maybe you prefer paying cash overusing credit, or, maybe you’re too young to have a credit history, or perhaps you carry high balances.

A “respectable” credit history can get you approved.

Bad credit, though, is different.

Characterized by collections, write-offs, and late and missed payments, “bad credit” will get your loan denied — especially when lenders begin to apply their overlays.

Overlays

A mortgage overlay is an additional mortgage guideline imposed by a lender, which goes beyond the loan’s official minimum standard.

For example, FHA allows FICO scores as low as 580, but many lenders set their minimums at 620.

According to Fannie Mae, the majority of mortgage lenders apply mortgage overlays. The most common overlay relates to credit scores.

About half of lenders surveyed apply overlays to the minimum credit score requirements of a mortgage loan. Your 500 FICO score, therefore, may not get you FHA-approved, even if the FHA allows it.

This is why it’s smart to re-apply for a mortgage if you’ve recently been denied. Your loan may have been turned down, but that could be because of an overlay. And Fannie Mae’s latest Lender Sentiment Survey indicates that overlays have “loosened slightly.”

Apply at a different bank, you may get different results.

Verify your mortgage eligibility (Oct 21st, 2018)

Become a credit card authorized user to boost your credit score

You can be added to “healthy” credit card accounts, and that can boost your credit score.

This strategy can help you if you’re new to managing credit and without many tradelines.

Tradelines are credit-lingo for “accounts with creditors”. When you’re short on tradelines, it can be hard for the credit bureaus to assign to you a credit score; and hard for lenders to know whether you’re a good borrower.

By joining an existing tradeline account as an Authorized User, you can piggyback on a relative’s or spouse’s good credit standing until you’ve had time to build a credit profile of your own.

Getting yourself “authorized” to use a family member’s credit card can be a terrific way to boost your own credit rating.

How mortgage lenders pull credit

When you apply for a mortgage, lenders pull a credit report from all three credit bureaus on you. Their decisions to lend, and the terms of your loan, depend on the result of those reports.

Lenders qualify you based on your “middle” credit score.

If your scores are 720, 740, and 750, the lender will use 740 as your FICO. If your scores are 630, 690, and 690, the lender will use 690 as your FICO.

When you apply with a spouse or co-borrower, the lender will use the lower of the two applicants’ middle credit scores.

Expect each bureau to show a different FICO for you, since each will have slightly different information about you. In all cases, though, you will need to show at least one account which has been reporting a payment history for at least six months in order for the bureaus to have enough data to calculate a score.

What makes up your credit score?

The FICO credit score takes into account information found in your credit report. Some parts of your credit history are more important than others and will carry more weight on your overall score.

Your FICO score is made up of the following:

  • Payment History : 35 percent of your total score
  • Total Amounts Owed : 30 percent of your total score
  • Length of Credit History : 15 percent of your total score
  • New Credit : 10 percent of your total score
  • Type of Credit in Use : 10 percent of your total score

Based on this formula, the largest part of your credit score is derived from your payment history; and, the amount of debt you carry versus the amount of credit available to you. These two elements account for 65% of your FICO score.

To put yourself in the best position to qualify for a mortgage, then, at the best possible terms, focus on these areas first.

Pay your bills on-time whenever possible, and pay revolving credit accounts to at least 20% of your available credit limits at least 30 days prior to applying for a mortgage.

This will improve your FICO scores and mortgage loan terms measurably.

Verify your mortgage eligibility (Oct 21st, 2018)

Getting a mortgage with no credit score

You can qualify for a mortgage even with no credit history.

Many individuals have purchased everything with cash. That’s actually a sign of fiscal responsibility.

That’s why most lenders can help you build a non-traditional credit report if you have no credit score or history.

The lender will take history from accounts like rent, utilities, and even cell phone to build a score for you.

Related: Getting a mortgage when you have no credit

How to correct credit report errors

In the event that you find errors on your credit report, take steps to correct them as quickly as possible.

First, contact the credit bureaus about the errors, and also whichever creditors have provided the erroneous information. Under the Fair Credit Reporting Act, each of these parties is responsible for correcting inaccurate or incomplete information in your credit report.

For simplicity, disputes can be managed online. If all three bureaus report the same error, though, remember to report the error to all three bureaus. Equifax, Experian, and TransUnion do not share such information with each other.

The law requires credit bureaus to investigate the items in question, usually within 30 days, unless your dispute is considered “frivolous”. Note that you may need to include copies of documents which support your position. Never send originals!

Within 45 days, the credit bureaus will notify you with the results of the investigation.

Then, you’ll want to obtain a new copy of your credit report in order to make sure that the errors have been corrected before applying for a mortgage.

Buying a house with a credit-challenged partner

Unfortunately, you can’t offset your co-borrower’s horrible history with your own pristine past. Even worse, it’s the applicant with the lowest “representative” credit score who determines how much the loan costs, or if you even qualify for financing.

What’s a “representative” credit score? It depends. Mortgage lenders almost always pull a “merged” credit report that provides at least two and usually three credit scores from Experian, Equifax and / or TransUnion.

If there are two scores, they use the lowest as the “representative” credit score. With three scores, lenders use the middle one.

Do you need your partner’s income to qualify?

Before undertaking a doomed application, use a mortgage calculator to see if you can qualify for the loan on your own. If your income is sufficient, you can leave your partner off the mortgage altogether.

You can always add her to the property title once the mortgage closes. However, doing this gives your partner some ownership interest in the property, while you would be the only one obligated by the mortgage.

Note that if you have joint bank and investment accounts, you can use this money for your down payment and count it as an asset on your mortgage application. Your partner will have to write a letter stating that you have access to 100 percent of the jointly-held funds.

Money in accounts that are solely in her name won’t be considered assets available to you under most program guidelines.

Use your partner’s income, not his/her credit

If your income leaves you a little short of being able to qualify for a home loan, you still have options.

Fannie Mae and Freddie Mac lenders both offer a flexible program that allows eligible borrowers to consider income from non-borrowing members of their households.

Under these programs, lenders allow you to stretch the debt-to-income guidelines. Instead of maxing out at 43 percent, you may be allowed a debt-to-income (DTI) ratio of up to 50 percent.

For instance, suppose your application looks like this:

  • Gross income: $5,000 per month
  • Proposed house payment (principal, interest, taxes and insurance: $1,900
  • Other payments: auto financing, student loans, credit cards, etc.: $500 a month
  • DTI ratio: $2,400 / $5,000 = 48 percent

That’s too high; you won’t qualify for financing under most programs. If your partner has verifiable income of at least 30 percent of yours ($1,500 a month in this case), the lender can approve your loan. Your DTI can be as high as 50 percent.

Verify your mortgage eligibility (Oct 21st, 2018)

Getting mortgage-approved while in credit counseling

Many times, however, counseling services put their clients into debt management plans, or DMPs. This can be an appropriate tool for clearing your debts.

With a debt management plan, you make a single monthly payment to your counseling agency, which then distributes monthly amounts to your creditors.

Often, the agency gets the creditor to reduce your interest rate, and your payment. However, if you are making reduced payments, your creditors can report this to credit bureaus.

That usually takes points from your credit score. In addition, creditors can report that the account is in a DMP if they accept a reduced payment or make other concessions for you.

When you enter a DMP, you usually have to close the included accounts. This can harm your FICO.

Finally, know that you will be held responsible (and it will likely be reported on your credit history) if your DMP is late with its monthly payments to your creditors.

Before you commit to a DMP, ask your creditors how the account will be reported to credit bureaus, so you can make an informed decision.

How do mortgage lenders feel about DMPs?

If your credit score and payment history are in their wheelhouse, and your debt-to-income ratio is acceptable, most mortgage lenders don’t care if you’re in a plan or not.

How does Fannie Mae and Freddie Mac feel about DMPs?

Neither Fannie Mae nor Freddie Mac’s underwriting guidelines specifically mention credit counseling or DMPs for conforming loans.

However, some lenders have published their own guidelines online. The term “debt management plan” does not appear at all.

For loans underwritten with Fannie Mae’s Desktop Underwriter (DU) software, guidelines read,”Regardless of DU Findings, the presence of consumer credit counseling service does not alter the underwriting recommendation.”

Freddie Mac lenders get similar guidance:

“Participation in credit counseling or completion of the same should not be the single determining factor in the credit decision. If a valid credit score is obtained and the credit history meets all the requirements of the individual loan program, no further credit evaluation is required.”

However, if a human manually underwrites your loan, the decision may be different.Underwriters use their best judgement, and opinions can vary. In addition, conforming mortgage lenders are permitted to “overlay” stricter requirements than agency minimums.

FHA Home Loans and DMPs

FHA mortgage guidelines do mention consumer credit counseling payment plans, and it’s okay to be in one and get a home loan if:

  • You are at least 12 months into the plan;
  • You’ve made all required payments in full and on time; and
  • You have written permission from the counseling agency.

This is nearly identical to the FHA stance on Chapter 13 bankruptcies, which are actually court-ordered debt management plans.

Verify your new rate (Oct 21st, 2018)