The Minimum Credit Score Needed for Conventional Mortgage
A conventional home loan is the most common loan product offered by mortgage lenders, making up roughly 64% of the market.
Conventional mortgage loans typically require higher credit scores than government-backed loans, but there are also many advantages to going with conventional mortgages. We’ll discuss these factors below.
What is the Required Minimum Credit Score for a Conventional Loan?
The minimum credit score requirement for borrowers to qualify for conventional loan options is usually 620. In addition to a good credit score, lenders usually impose conventional loan requirements, including a 3% down payment and a maximum debt-to-income ratio of 43%.
How Can Credit Scores Affect Mortgage Interest Rates?
Conventional loans are issued by banks, credit unions, and other private lenders. They are also separated as either conforming loans or non-conforming loans. Conforming loans meet the funding criteria of Fannie Mae and Freddie Mac as follows:
- Meet minimum credit score requirements–typically in the 620 to 640 range.
- A down payment of typically about 3%.
- Currently, the conforming loan limits (maximum) are approximately $510,400 in most regions.
- A debt-to-income (DTI) ratio of under 43%, which is calculated as: DTI = Total Gross (pre-tax) Monthly Earnings / Total Monthly Debt Obligations.
The most common non-conforming loan is a jumbo loan. A jumbo loan is a conventional loan that is deemed as non-conforming because it exceeds the maximum ‘conforming’ loan limit.
Lenders often impose stricter credit score requirements to qualify for these larger and potentially riskier loans; therefore, many require a 680 minimum score. Always consult with your loan officer, as institutions have different qualifying criteria.
Lenders typically require that those with a conventional mortgage loan pay private mortgage insurance until they achieve equity of at least 20%. Private mortgage insurance protects lenders if the borrower fails to make the mortgage payments and defaults on the loan agreement.
Private mortgage insurance rates for conventional loans range from 0.58% to 1.86% of the principal loan amount, which translates to roughly $30 to $70 per month for every $100,000 borrowed.
Keep in mind that mortgage interest rates fluctuate based on market conditions; therefore, if rates drop significantly in the future, homeowners may want to refinance their existing mortgage to obtain better interest rates.
Many borrowers that had bad credit when they obtained their original mortgage also may refinance their existing loan if they have improved their credit history. A refinance often makes sense when your credit score has improved enough to obtain a significantly lower rate.
The following table illustrates how a borrower’s credit score impacts the overall amount of interest they will pay.
Credit Score: 30-Year Conforming Conventional Loan
|Borrower’s FICO Credit Score||Home Loan Amount||APR||Monthly Payment||Total Interest Paid|
|760 to 850||$ 200,000||6.244 %||$ 1,231||$ 243,035|
|700 to 759||$ 200,000||6.466 %||$ 1,260||$ 253,480|
|680 to 699||$ 200,000||6.643 %||$ 1,283||$ 261,881|
|660 to 679||$ 200,000||6.857 %||$ 1,311||$ 272,123|
|640 to 659||$ 200,000||7.287 %||$ 1,369||$ 292,975|
|620 to 639||$ 200,000||7.833 %||$ 1,444||$ 319,953|
Source: The MyFICO Mortgage Rate Calculator. Rates from March 18, 2023.
In the table, the rates are listed as annual percentage rates (APR) rather than the mortgage interest rate. The mortgage interest rate is specifically the cost that the borrower incurs for receiving the loan.
The mortgage interest rate does not represent the actual cost to the borrower. The APR represents a “true” cost of the mortgage because it includes the interest rate as well as any applicable broker, underwriting, processing fees, prepaid interest, and others.
What is a Good Credit Score for Buying a House?
It is important to initially outline some basics regarding credit scores and what constitutes a good or bad credit score. Your credit score is a three-digit number ranging from 300 to 850 that is calculated based on the entries that exist on your credit bureau reports.
The three primary bureaus that compile consumer credit data are Equifax, Experian, and Transunion. Equifax loosely categorizes credit scores as follows:
- Excellent: 800 or higher
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Bad: 579 and below
Those with lower credit scores that may struggle to qualify for a conventional mortgage loan have other loan types to consider that have more lenient credit score requirements.
Unlike conventional loans, Federal Housing Administration loans (FHA loans) are insured or “backed” by the government, which decreases the level of risk that lenders assume. Here, lenders are more incentivized to offer mortgage loans to those with fair or bad credit.
FHA lenders may have slightly differing requirements. FHA borrowers with a 500-credit score may qualify if they have a 10% down payment and those with a 580 score may qualify if they have a 3.5% down payment.
FHA borrowers are subject to maintaining mortgage insurance, which generally spans the entire term of the FHA loan.
The U.S. Department of Veteran Affairs loans (VA loans) are a benefit that is reserved exclusively for military members and their spouses. Although VA loans have no formal, written minimum credit score requirements, borrowers generally have at least a 580 score.
VA loans also require no down payment but funding fees and closing costs typically apply, which might be expenses that are spread throughout the term of repayment.
The U.S. Department of Agriculture loans (USDA loans) are partially insured by the Rural Housing Service and are designated for low-to-middle income people exclusively for properties in rural communities.
Like VA loans, the USDA has no formal, written minimum credit score requirements, but borrowers who qualify typically have at least a 620-credit score. No down payment is required but expect to pay funding fees and yearly mortgage insurance premiums.
How to Improve Your Credit Score
Years ago, consumer credit scores varied considerably based on a lack of uniformity for assessing credit. In 1989, the Fair Isaac Corporation (FICO) introduced the FICO Score concept, which has since become the industry standard for these calculations.
Most lenders use the FICO Score as the basis for making individual lending decisions. Your FICO Score reflects all the positive or negative information that is contained in your credit report.
Five types or categories are used for this calculation. Each category has a weighted emphasis or level of importance that is expressed as a percentage as follows:
- Payment history (35%): The single most important influence is your history of making timely payments. Those with late payments and credit accounts that have been pursued by collection agencies will certainly notice derogatory entries on their credit report.
- Amounts owed (30%): Your overall amount of debt has significance; however, this category also identifies borrowers who may be “overextended” or “maxed out”.
- Length of credit history (15%): Lenders prefer to see a multi-year record of responsible credit management.
- New credit account/history (10%): Many lenders view multiple recent or abrupt applications for credit accounts or open credit accounts as a possible “red flag” that suggests a consumer is having financial problems.
- Credit mix (10%): Consumers with a record of responsibly managing two or more types (categories) of credit accounts typically notice a small positive increase in their scores. Examples include a mortgage, student loan, auto loan, credit card, etc.
Next, we will address some specific strategies that can boost your credit score.
Use a Credit Builder Loan Like Credit Strong
One excellent option is a credit builder loan from Credit Strong, a division of Austin Capital Bank, an FDIC insured bank. Credit Strong provides installment loans to consumers that are seeking to improve their credit.
Rather than a typical loan where the borrower receives the loan funds upfront, the funds are deposited in an FDIC-insured savings account and held throughout the loan term. Each month, the borrower makes a fixed, affordable monthly payment toward the loan balance.
During this repayment process, Credit Strong reports the consumer’s payment history to all three major credit bureaus, which will establish a positive credit history that can effectively boost credit scores.
At the conclusion of the selected loan term, the funds in the savings account are released to the borrower, which will include any interest that has accrued.
Keep Your Credit Utilization Low
Your credit utilization rate is a calculation that measures the proportion of credit that a consumer is currently using compared to their overall total available credit.
A borrower’s utilization rate is a tool that lenders use to assess creditworthiness and their potential risk. If a borrower has a $1,000 credit card limit and has a $990 balance, the account is on the verge of being “maxed out”.
It is generally accepted that a “good” utilization rate is one that is below 30%; however, a report recently found that most consumers with a credit score of 750 currently use less than 10% of their maximum available limit.
The following table illustrates a credit utilization rate example for a consumer with three credit card accounts.
Credit Utilization Rate Example
|Credit Card Accounts||Current Balance||Available Credit Limit|
Or, in other words, $1,000 / $3,000 = .33 or 33%.
One way to instantly improve your utilization is to open a Credit Strong Revolv credit builder account. A Revolv account instantly increases your available credit by $500, lowering your total utilization.
Get Secured Credit Cards
Secured credit cards are another basic tool for those with no credit history to build credit history or to rebuild their credit.
Unlike the more common unsecured credit card, a secured credit card requires the applicant to make an initial security deposit to establish the account, which is typically in the $200 to $300 range.
The security deposit is usually equivalent to the card’s spending limit and is refundable after either paying the card balance off and closing the account or after demonstrating a pattern of responsible usage.
This usually makes you eligible for an unsecured card with that lender.
To improve your credit using a secured card, use the card with some regularity and pay off the balance before the due date.
This not only demonstrates a pattern of usage but also allows you to avoid incurring the steep interest rates that are often in the range of 13% to 26%.
Shop around to find options with modest fees and remember that the aforementioned credit utilization rate is a factor with credit cards and should be maintained below 30%.
Pay Your Bills on Time
Your payment history is the single most critical factor that influences your credit score, accounting for roughly 35%. Putting significant effort into improving your overall credit could quickly backfire if you begin making late payments.
Keep in mind that failing to pay other “non-credit” bills on time is important also. For example, unpaid utility company bills or phone bills often are sent to collection agencies and reported as delinquencies to the credit bureaus.
Check Your Credit Report for Accuracy and Report Inaccuracies
Consumers are eligible to receive a free copy of their credit report from the bureaus each year. Review your credit reports for any errors such as collection accounts showing up on your report that are not yours.
The process of disputing a potential error on your credit report is now easier than ever, as the major credit bureaus all now have simple forms for reporting errors on their websites.
Prospective homebuyers that are entering the mortgage loan market must understand the financial ramifications that may result from your credit score.
Those with very poor credit are encouraged to begin a comprehensive strategy for improvement before securing a mortgage.
You may be interested in building credit and saving money, but you aren’t sure what to expect from a Credit Strong account. Building credit can be frustrating andRead More