Mortgage shopping with a 640 credit score? You have options

Michele Lerner
Michele Lerner
The Mortgage Reports Contributor
December 17, 2021 - 9 min read

How to buy a home with a 640 credit score

You can qualify for most mortgage loans with a 640 credit score.

But a 640 credit score alone won’t guarantee your loan approval. You’ll also have to follow your lender’s income, debt, and down payment rules.

And, with a higher credit score, you could get a lower interest rate, a bigger loan, or both.


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How good is a 640 credit score?

According to FICO, the average credit score in August 2021 was 716, so a FICO score of 640 is below average.

Generally, “fair” credit scores range from 620 to 679. Applicants with a score below 620 are considered higher-risk, and will have more trouble qualifying for a mortgage loan.

So a credit score of 640 is on the lower end of the spectrum for many mortgage lenders. It should get you approved, but it’s typically not high enough to get the best interest rates on any type of loan.

Plus, your credit score is only one piece of the underwriting puzzle. Your existing debt, income, assets, and down payment size play a role, too.

You may need to be stronger in these other aspects with a score of 640.

Best loan programs for fair credit scores

A fair credit score won’t necessarily disqualify you, but you may have to pay more for your mortgage.

Applicants with lower credit scores pay more through higher interest rates. In some cases they could also pay higher private mortgage insurance premiums.

In most cases, government-backed loans have more forgiving credit history guidelines.

1. Conventional loans

Conventional loans are not insured by the federal government, so a lower credit score usually has a bigger impact on conventional loan interest rates.

Freddie Mac and Fannie Mae, two government-sponsored enterprises that buy these loans from lenders, set the rules for conventional loans. Loans that follow the rules are called “conforming loans.”

Conforming loans require at least a 620 credit score. Lenders can set their own minimums higher, though, depending on your down payment and debt-to-income ratio.

To qualify you with a 640 FICO score, your lender may require a down payment that’s higher than the 3% minimum for conventional loans. You might also need additional ‘cash reserves,’ which are savings left over in the bank after your down payment and closing costs have been paid.

2. FHA home loans

FHA loans are insured through the Federal Housing Administration. This insurance protects the lender if you fail to repay the loan.

FHA insurance allows borrowers with lower credit scores to still qualify, even when they don’t have the 620 required for a conventional loan.

In fact, the minimum credit score established by the FHA is 500, but you’d need to make a down payment of at least 10%. And not all FHA lenders will approve a borrower with a score that low.

To qualify for the FHA’s minimum down payment of 3.5% you’ll need a minimum FICO of 580.

But FHA lenders are allowed to impose higher credit score minimums, and many do. Lenders do this in order to reduce their foreclosure rate.

Borrowers with a 640 credit score can often get lower interest rates with FHA than they would with a conventional loan. But FHA loans can also charge mortgage insurance for the life of the loan which could erode your savings.

3. VA home loans

VA home loans are a government benefit available only to eligible active military members, veterans, some surviving family members, and members of the Reserves and National Guard.

With insurance from the Department of Veterans Affairs, VA loans require no down payment at all, and borrowers won’t pay ongoing mortgage insurance premiums.

The government doesn’t set a minimum credit score, but many lenders do. A 640 FICO can get you approved for a VA home loan if your income is sufficient to qualify.

4. USDA home loans

USDA loans are also called Rural Housing loans. To be eligible, the property must be located in an area that’s been designated as rural by the U.S. Department of Agriculture.

However, the USDA’s definition of “rural” is loose. Many suburban neighborhoods across the U.S. are eligible.

In addition, the borrower’s income cannot exceed certain limits, which depend on the Area Median Income (AMI).

The minimum credit score in most cases is 640. Those who qualify with credit, location, and income can buy a home via USDA with no down payment.

5. Credit union mortgages

Some credit unions have no established minimum credit score requirements for borrowers who are members of the credit union.

However, credit unions are owned by their members and known to lend rather conservatively.

If you’re struggling to qualify for a mortgage because you have bad credit, a credit union may be able to help.

6. Non-prime and non-QM loans

Some mortgage lenders don’t sell their loans to investors, so they can largely make their own rules. These lenders are called “portfolio lenders,” and some offer loans with low credit score requirements.

Loans for borrowers with fair or low credit scores may be called “non-prime” or “non-QM” mortgages.

One San Diego-based lender, for example, allows FICO scores as low as 500 with at least 20 percent down.

These loans come with significantly higher interest rates, though. So they’re typically not the best choice for new homeowners. If you can qualify for a government or conventional loan program, take that path first.

640 credit score mortgage rates

Borrowers with a credit score of 640 can expect to pay higher rates than borrowers in the high-600 or 700 credit score range.

Below, we used FICO’s rate estimation tool to show how mortgage rates can vary by credit score. These rates were average on the day we checked, but rates can vary from day to day. Your own interest rate will be different.

FICO’s estimates can show you how credit scores impact mortgage interest rates on average.

FICO score rangeAPR on 30-year fixed loan of $300,000Total interest paid over the life of the loan
640-6593.896%$209,154
660-6793.466%$182,921
680-6993.252%$170,141
700-7593.075%$159,713
760-8202.853%$146,815

Source: Fair Isaac Corp.

As you can see, raising your score by 20 points — from 640 to 660 — shaves about 0.4% off average interest rates, saving about $26,000 over the life of the loan.

How much of a home loan can I get with a 640 credit score?

A credit score of 640 can affect the size of your mortgage loan. But just like with interest rates, your credit score won’t be the only factor underwriters consider. Your existing debt, income level, and down payment size also play a big role.

A borrower with a 640 credit score who has a low debt-to-income ratio (DTI) and a large down payment can usually borrow more money than a 640 credit score borrower who has a higher DTI and can make only the minimum down payment.

The type of loan you choose also affects loan sizes. With a credit score of 640, for example, you may find an FHA loan can offer the best interest rate.

In most areas, the FHA would limit your single-family home loan to $. Meanwhile, a conventional loan could go up to $ in most areas. (USDA and VA loans don’t impose program-wide loan limits.)

Loan limits go higher in places where houses cost more. But keep in mind loan limits set the ceiling for loan sizes. How close you can get to that ceiling will depend on your individual qualifications.

Lender overlays can change credit score minimums

In theory, a credit score of 640 shouldn’t block you from getting a mortgage. But even if a loan program is OK with your credit score, the lender itself may not be.

Lenders and their investors get to decide for themselves whether to approve a borrower’s loan application even if the borrower meets the loan program’s minimum requirements.

Some lenders simply set their minimum credit score higher to avoid loaning money to someone they consider risky. In addition, conventional loan lenders use risk-based pricing, which means they charge higher interest rates for lower FICO scores.

Lenders can add additional “overlays” to their loans, such as requiring extra cash reserves or larger down payment for loan approval, or charging a higher interest rate or higher fees to borrowers with fair credit.

How to compensate for a fair credit score

If you don’t want to wait until your FICO score improves, you can make your application more attractive to lenders in several ways:

Make a bigger down payment

A down payment of 20 percent or more makes you a stronger candidate for a loan, because you already have built-in home equity. In addition, a bigger down payment gets you smaller mortgage payments.

Increase cash reserves

If you can document that you have several months of mortgage payments in the bank (three to six months is often considered helpful), lenders have more confidence that you can repay your loan if you have a cash crunch.

Reduce your debt-to-income ratio (DTI)

Your debt-to-income ratio compares the minimum monthly payment on all your current debt, including your mortgage, to your gross (before tax) monthly income.

A ratio over 43% is considered high by many lenders, so lower is better.

If you apply and get turned down for a mortgage, it’s not the end of the world. Ask your lender what you’d need to do to change your denial to an approval. Or simply find another lender with more forgiving guidelines — they’re out there.

Go with a different type of loan

Matching your specific situation with the right type of loan can help you qualify for the mortgage you need.

For example, if you’re dealing with a fair credit score, a high debt-to-income ratio, and a low down payment amount, your loan options may not include conventional loans.

An FHA loan could insulate you from the negative effects of your weaker credit profile.

Later, once you’ve raised your credit score and built some equity,, you could refinance into a conventional loan to bypass the FHA’s annual mortgage insurance premiums.

Pick the right loan term

Even when you choose the right type of loan, you’ll also need to choose the right loan term.

For many borrowers, a 30-year term makes most sense because of its lower monthly payments. Others can afford the higher payments on a 15-year term and benefit from its long-term savings on interest.

How can I improve my credit score?

Yes, you can get a mortgage with a credit score as low as 640. But there’s no doubt a higher credit score can improve your chances of getting your loan approved.

If you’d like to increase your credit score, you should start by checking your credit reports, with all three credit bureaus, for errors. You can get a free credit report each year from Equifax, Experian, and TransUnion at annualcreditreport.com.

Disputing errors could boost your score within a couple of months.

You can also improve your score by:

  • Making on-time payments: Payment history is a big component of your FICO score, the scoring model most lenders use
  • Lowering credit utilization: Paying down credit card balances (but leaving the credit accounts open) can lower your credit utilization ratio and improve your score
  • Avoiding new credit inquiries: Applying for too many new credit accounts can impact your score
  • Keeping a good mix of accounts: The FICO scoring model likes to see a variety of credit accounts: a mix of student loans, auto loans, credit cards, and personal loans, for example
  • Asking for a rapid rescore: Your mortgage lender can help you look into ‘rapid rescoring,’ which might increase your score quickly by removing negative errors, or at least give you a better idea of what you need to do to improve your score

Making these kinds of changes can yield results within a few months for some borrowers. Others may need a couple years to see a big improvement. As your credit accounts age, your score should increase some, too.

Where do I find my credit score?

There are several ways to check your credit score, but be sure you’re checking the score that matters to lenders.

Most lenders use the FICO scoring model. Many of the free credit monitoring apps you can download do not show your FICO. Instead, they show a composite score, or they use their own algorithms to approximate your score.

Services like these can still be helpful. They can alert you to new credit applications, for example. But the scores you’ll see in them may be artificially high.

Applying for a mortgage pre-approval with a lender can show your FICO without prompting a hard credit check that could affect your score.

What are today’s fair credit mortgage rates?

Mortgage rates today are so low that even if you pay a little more for having a fair credit score, you’ll still be getting a historically good interest rate.


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