What is the best credit score for a home loan?

There’s a common misconception that you can get a credit score as low as zero. But today, we’re happy to set the record straight.

There. Is. No. Such. Thing!

That is, you either have a credit score, or you don’t because a credit score is simply the measure of your most recent credit history. If you haven’t built any credit history just yet, there might be zero files under your name, in which case, there is no FICO score they can generate, but it doesn’t equate to having a zero credit score.

If you have stumbled on this article because you just found out your FICO score and you’re wondering if it’s good enough for a home loan, you’ve come to the right place! Here, we’ll note the different types of mortgages and the minimum credit scores they ask for. Remember, to qualify for a mortgage, it is inherent that you already have some credit history under your name, and if you have no idea what your score is, it’s probably just time to check your own credit report!

Why credit scores are important when you want to buy a house

For most borrowers, mortgages are the most significant debt obligations they will ever get. Some people go into credit card debt, while others prefer to pay installments on bigger purchases. But none of these transactions can usually compare with a home loan. And because of the immensity of the mortgage responsibility, it is understandable how many people’s homes eventually undergo foreclosures, especially if the borrower experiences many financial setbacks.

Imagine this, a man on the street tries to convince you to take out your savings to help him fund a dream project. Sure, his idea sounds great, and you’re not really after the profits he’ll make once it gets off the ground, but you are concerned if he’ll be able to pay you back when he says he can. After all, you don’t know this man from Adam. While it might not matter what his politics are or how he likes to wear his clothes, there would be one aspect of his character you’ll want to learn about: how trustworthy he is with money.

A Foundation in Trust

In Sapiens: A Brief History of Humankind, Yuval Noah Harari describes money as a system of mutual trust. Our whole banking system. The very dollar bills we keep in our wallets. The foundation of what makes all jobs churn so that the economy can keep turning is the trust that we won’t break our promises to each other (which is why when these promises do get broken, the police usually get involved, and people go to jail).

No matter how low or how high you might think your credit score is, it really is just a number that mortgage lenders use as a criterion for judging if you are eligible for a loan. It changes more often than you probably think it does, and it can sometimes be affected by factors outside your control.

Regardless, it can be easy for us to put ourselves in mortgage lenders’ shoes to see just why it is essential to use this value as a determinant of someone’s eligibility. One of the many domino pieces that brought the economy down in the late 2000s was the thousands of foreclosures that happened because borrowers were sold mortgages they couldn’t afford. You might say that mortgage lenders need to ask for minimum credit score requirements to approve a loan, but that same credit score demand might also save you from a similar disaster down the road.

Type of Loan according to Minimum Credit Score Requirements

A Few Notes

Even though certain loan types prescribe a minimum credit score, this number can vary by lender.

Lenders also don’t base their FICO score on the report of just one credit bureau. Instead, they usually check your credit reports from the three major reporting institutions: Equifax, Experian, and TransUnion. So don’t be surprised if you get different FICO scores from all three of these bureaus. However, please take note that lenders don’t get the average of the numbers they generate. Instead, they take the middle score and use this to gauge your mortgage eligibility.

For example, say you got a score of 620 from Equifax, 630 from Experian, and 661 from TransUnion. The average of these numbers is 637, but the mortgage lender won’t treat 637 as your “credit score” when they decide your eligibility. They’ll base it on 630 (Experian) instead since the number falls in the middle of the two other values.

Type of Home Loans

FHA Loan

Minimum credit score needed: 500

A lot of borrowers flock to FHA loans because of the low down payment required. With a credit score of just 580, you will only be asked to put down at least 3.5% of your house’s original purchase price. However, to qualify for a loan backed by the Federal Housing Administration, you don’t need to have a 580 FICO score to qualify. With a credit score of at least 500, you’ll be allowed to apply as long as you have enough cash for a 10% down payment.

Another great thing about FHA loans is that the money you will use to make the down payment doesn’t have to come from your own savings. Instead, the FHA allows up to 100% of it to come from a cash gift from friends or relatives or even from a cash grant.

Conventional Loan

Minimum credit score needed: 620

If you have many savings and want to buy a house but don’t want to pay in cash, you might be eligible for a conventional loan. Unfortunately, these mortgages are not insured by the federal government, so most of the time, you’ll have to pay private mortgage insurance (PMI), but you do get the advantage of making a down payment as low as 3 percent. If you can make a down payment of 20%, though, you’ll be allowed to skip PMI altogether, so that’s something that you might want to consider.

With a conventional loan, you can borrow money for a secondary home or even an investment home, which a government-backed loan won’t really let you do. However, people usually go for this option because of the higher amounts that mortgage lenders can allow you to borrow.

VA Loan

Minimum credit score needed: 640

When it comes to government-backed loans, there are two types called zero-down payment mortgages. The first loan type of this kind we’ll discuss is the Department of Veterans Affairs insures.

Even if you are eligible for an FHA loan, if you are a service member, you will want to go for a VA loan instead, especially if you meet the credit score needed. These loans have been rising in popularity even during the pandemic due to the Blue Water Navy Vietnam Veterans Act of 2019 that took effect last year.

With VA loans, you’ll be able to enjoy the most competitive interest rates you can find in the mortgage industry, as well as not being obligated to make a down payment to move into your dream home. We’re sure you’ll agree with us when we say that it’s just one of the many hard-earned benefits of serving our country.

USDA Loan

Minimum credit score needed: 640

If you plan to buy a house in a rural area, you can also try applying for a mortgage loan backed by the U.S. Department of Agriculture. This is the second type of loan backed by the federal government that doesn’t ask for a down payment.

Although the credit score required to avail one is set at 640, this is just a general rule to help you experience a smoother process. You don’t need to be in the agriculture industry or plan to get into farming to qualify for one, and to increase the opportunities out there, if you don’t meet the prescribed credit score of 640, the government can still allow you to take on a USDA loan if you can explain the circumstances that led to your lower credit score. That is, you have to prove that factors impacted your low credit score outside of your control.

A Mortgage Type for Every Need

There might be many people out there who are anxious about applying for a mortgage, especially after seeing their own credit report. However, it is important to understand that there are different mortgage types for different home buyers because each caters to a specific need.

If you don’t meet the credit score requirements, it still isn’t time to fret! There will always be time to improve your credit score, and you might even be able to increase your rating in as little as a few weeks!

Don’t let credit scores define who you are or how you will look at yourself. You might even find that it’s just a challenge you need to overcome. So give yourself a chance to grow, and next thing you know, you might be moving into the home of your dreams in no time at all!