As you probably know, your credit score plays a crucial role in your ability to buy a home. But most people don’t know how much it impacts their monthly payments and the total amount they’ll spend on their mortgage.  Not only does it help you qualify for a mortgage, but the higher your credit score, the lower your interest rate will be. A rate that’s just 0.5% lower means you’ll likely spend from tens to hundreds of thousands of dollars less over the course of your loan.

Mortgage lenders put a heavy emphasis on credit reports because they provide a comprehensive summary of how you have managed your finances over time. A high score is a sign that you’re a responsible borrower.

Your FICO score is a credit scoring model used specifically for mortgages. It is determined by your broader credit report, which provides information about your payment history, number and types of open accounts, and several other factors.  A FICO score is a number that is calculated using a proprietary formula and data compiled by the three major credit reporting bureaus, (Experian, Equifax, and TransUnion).

FICO credit scores can range from 300-850. According to Experian, most consumers have credit scores that fall between 600 and 750.

Please review our prior post: (How FICO Credit Scores are Calculated) if you are interested in learning more details about the formula used by the reporting agencies.

What is a Good Credit Score for a Mortgage Application?

A good credit score to buy a house is 720 or higher. A credit score of 800 or higher is ideal, as it unlocks the very best loan rates and terms. However, borrowers with scores as low as 670 can still expect relatively good rates.

What is the Minimum Required Credit Score?

The absolute lowest credit score to secure financing for buying a house is a FICO score of 500, but expect to pay a larger down payment with higher interest rates. Buyers who pursue an FHA loan, (one of the most common loan types for first-time buyers), usually need a score of 580 or higher.

Minimum Required Credit Scores for Specific Loan Types

The score you’ll need often depends on the type of loan you’re using and other qualifying factors, like the size of your down payment, income, and debt.

Conventional Loans – Minimum 620 to 660:
Conventional loans are the most common type of mortgage loan and are especially popular with repeat buyers who have larger down payments. They’re popular because they offer lower interest rates than other loan types and because you can avoid paying for mortgage insurance if your down payment is 20% or more of the purchase price.

FHA Loans – Minimum 500 to 580
FHA loans have helped many first-time home buyers.  They are backed by the government, and credit score requirements are less strict. If your credit score is 580 or higher, you’ll only be required to make a down payment of 3.5%. If your score is between 500 and 580, the minimum down payment increases to 10%. (Note: All FHA borrowers must pay a monthly mortgage insurance premium.)

VA Loans – Minimum 580 to 620:
VA loans are available for active military service members and veterans. VA loans offer competitive mortgage rates and do not require a down payment when purchasing a home. Unlike an FHA loan, borrowers are not required to pay mortgage insurance, but there is a required upfront funding fee, which is used to help cover the cost of the program.

USDA Loans – Minimum 580 to 620:
USDA loans, backed by the US Department of Agriculture, offer an opportunity for low-income borrowers seeking to buy homes in rural areas.  Loan requirements for homes in qualifying areas are far more flexible than conventional loans.  With USDA loans, there is no need for a down payment or mortgage insurance. However, an upfront funding fee will be required.

Jumbo Loans – Minimum 680 to 700:
A jumbo loan earns its name because of the amount of money being borrowed. Jumbo loans are used for home buyers in expensive housing markets where loan amounts exceed conventional loan limits. Minimum credit scores are higher because of the amount of money being borrowed. Many lenders require a minimum 20% down payment, and rates are similar to those of a conventional loan.

Calculating Your Credit Score With a Co-Borrower

If you’re buying a home with a co-borrower, your lender will review both of your credit scores and calculate a “decision score.” This score is the lowest middle score of the two borrowers.

As an example, let’s say you have credit scores from the three credit bureaus of 740, 745, and 750 and your co-borrower has credit scores of 650, 664, and 670. The lowest scores come from your co-borrower, and their middle score is 664. Lenders will use a decision score of 664 to determine whether or not to approve the loan and define the loan terms.

A major benefit of buying with a co-borrower is being approved for a larger loan amount because your combined income is higher than your individual income. However, if one applicant has a low credit score, you may consider applying for the loan using only the applicant with a healthy credit score.  This should qualify you for a better rate, but the tradeoff is that you may be approved for a lower loan amount.