A credit score is one of the most important factors in successful homebuying. Not only can it determine whether you qualify for a mortgage loan, but also the type of loan you can get and what your interest rate will be.
The minimum credit score for a conventional loan is 620, though a higher score can make it easier to qualify and snag a more competitive rate.
Don’t have a 620 yet but have your eye on a conventional mortgage loan? We’ll walk you through your options and give you some tips on how to boost your score.
What’s the minimum credit score for a conventional loan?
The minimum credit score for a conventional loan is typically 620. Lenders will look at your scores from the Big Three credit bureaus: Experian, TransUnion, and Equifax. They’ll use your middle credit score to qualify you for the loan.
So if your scores look like this:
|Credit bureau||Credit score|
Your lender will use the Equifax score of 700 for your application because it falls in the middle of your credit score range.
If you apply with a co-borrower, they will look at their three scores as well. But they will take whichever middle score is lowest to determine your loan eligibility.
Let’s assume both of your scores are as follows:
You: 720, 680, 700
Co-borrower: 700, 680, 640
Your middle score is 700, and theirs is 680. The lender will use 680 as the qualifying score, since it is the lowest of the two middle scores.
One point can make a difference
Conventional loans are very rate sensitive.
The agencies base your mortgage rate partially on your credit tier. For instance, someone with a credit score between 660 and 679 gets a worse rate than someone with a score between 680-699.
In fact, the interest rate you may get with a 679 score is about 0.25% higher than if you had a 680, if you put 10% down. So you’d pay about $47 per month extra on a $350,000 loan for that one little point.
For this reason, if your loan file’s middle credit score as described above ends in a 9, it should make you sit up and pay attention. You could be one point away from saving a lot of money.
The top end of the credit tiers are as follows, according to Fannie Mae’s Loan Level Price Adjustment Matrix:
If your score is at or near one of the above, check with your lender on how you can improve your credit slightly to get into the next tier. All it may take is paying down a credit card a small amount.
Keep in mind that every credit profile is different and there’s no guarantee that your credit score will rise when the lender re-pulls your credit (and there may be a fee for that). But it could be worth a try if you’re close to being able to save money each month.
What affects your credit score?
The most important factors in credit scores are:
- Payment history (whether or not you pay bills on time)
- Credit utilization (how much credit you’re using out of what you have available)
- Age of credit: How long have you had your oldest credit account
- New credit: Opening new credit cards or loans right before applying for a mortgage is a red flag to lenders
- Credit mix: Generally speaking, lenders like to see a solid mix of credit types, including credit cards, installment loans such as a car payment or student loans, and (if applicable) a mortgage
We bolded the top two because these are the biggest factors in your credit score. Lenders want to see that you have a track record of paying your bills on time. Credit utilization tells them how well you manage your money. Do you max out your credit cards as soon as you open them? Or do you keep your balances low and leave most of your credit lines available?
Lenders look at your credit score and credit history to get a sense of the type of borrower you are. They want to know that if they approve you for a mortgage, you’re highly likely to make your monthly mortgage payment.
Keep in mind: Your mortgage credit score may be different from the score you see through a free app. Those apps can give you a ballpark score, but lenders use strict criteria to approve home loan applications. Your “mortgage credit score” may be lower than what you see from a free service.
Rather than make assumptions about what you’ll qualify for, it’s best to get preapproved with a lender who will pull your score and provide an accurate estimate of how much you can borrow.
Don’t forget about your debt-to-income ratio
Your debt-to-income ratio (DTI) is another big mortgage criteria. DTI refers to your total monthly debts vs. your gross monthly income. Typically, you’ll need a DTI of 45% or less to qualify for a conventional conforming loan — the most common type of conventional loan for buying a home.
Conforming loans are overseen by the government-sponsored entities Fannie Mae and Freddie Mac. These agencies set guidelines lenders must follow when approving conforming loan applications.
|Here’s a tip: If you’re getting ready to buy a home, avoid making other big purchases or taking out new loans and credit cards. Not only will high balances and new loans affect your debt-to-income ratio, your lender may think you’re either struggling financially or about to significantly increase your debt. Either way, that’s not something they want to see before approving you for a home loan.|
Hack: Choose FHA if you have a low credit score and less than 20% down
Many people assume that a conventional mortgage is always better than one backed by the government. But in fact, an FHA loan, which is backed by the Federal Housing Administration (FHA), may give you a lower monthly payment if you have a low credit score and low down payment.
Due to loan-level price adjustments, your interest rate on a conventional loan can be substantially higher if you have a score below about 680.
Loan-level price adjustments are essentially price increases Fannie Mae allows lenders to make when a borrower has a lower credit score. A low credit score indicates increased risk to the lender, and the rate increase compensates them for taking on that risk.
But the FHA loan program was designed to make homeownership accessible to people with lower scores. The minimum credit score requirement for an FHA loan with 3.5% down is 580. Because these loans are government-insured, the risk for lenders is reduced, enabling them to approve lower-credit borrowers — potentially at lower interest rates.
What does that mean for you?
If you have a 640 score, the interest rate on an FHA mortgage could be about 0.50% lower than a conventional mortgage rate.
On a $250,000 mortgage with 10% down, your payment might be roughly $1,102 monthly based on the average current conventional rates.
It would drop to $1,037 if the rate is 0.50% lower – or $65 less per month.
Interest rates depend on the specifics of your finances, where you’re buying, the home price, and how much you put down. These numbers are an example only.
Better credit can mean better interest rates
Credit scores are a significant factor in determining the interest rate you’ll receive. Credit scores needed for a conventional loan are higher than those for FHA or even VA loans, which are government-backed by the U.S. Department of Veterans Affairs (VA). That’s because lenders take on more risk.
To incentivize good credit, they offer more competitive rates to borrowers with higher credit scores, lower debts, and larger down payments.
Mortgage insurance rates on conventional vs FHA loans
Mortgage insurance is also generally cheaper with an FHA loan. Lenders require private mortgage insurance (PMI) for borrowers who take out a conventional loan with less than a 20% down payment. The PMI requirement ends once you have 20% equity in the home.
If you buy a home with an FHA loan at 3.5% down, you will pay an upfront and annual mortgage insurance premium (MIP). FHA loans with less than 10% down require MIP for the life of the loan.
However, you can start out with an FHA loan and likely pay less for mortgage insurance than you would with conventional loan PMI. Then, when you have 20% equity in the home, you can refinance to a conventional mortgage with no PMI.
PMI with a 640 score and 10% down would be 0.91% of the loan amount per year currently on a conventional loan, compared to FHA mortgage insurance of 0.80% per year, according to private mortgage insurer MGIC.
So on a conventional $250,000 loan, the PMI alone would be roughly $152 per monthly versus $133 per month with an FHA loan. In total, your combined mortgage and PMI savings with an FHA loan would be more than $80 per month.
|Mortgage insurance rate per year||0.91% of the loan amount||0.80% of the loan amount|
|Mortgage insurance cost||$189*||$167|
|Principal & interest payment||$1,102*||$1,037*|
*This does not reflect an official mortgage loan offer. Payment based on myFICO data at the time of writing. Your rate and payment will be different. PMI based on MGIC data and subject to change. Total payment does not include property taxes, insurance, or HOA dues.
My credit score isn’t so great, what are my options?
If don’t have the 620 credit score needed for a conventional loan, you’ve still got options. Government-backed mortgages like the FHA, VA, and USDA loans have more flexible guidelines than conventional loan requirements.
USDA loans, which are insured by the U.S. Department of Agriculture (USDA) appear to have a higher credit score requirement than the conventional loan credit score minimum at first glance: 640 vs 620.
However, the 640 minimum is a USDA guideline but not a hard and fast rule. The USDA allows lenders to approve borrowers at lower credit scores if they have compensating financial factors such as a very low DTI or significant savings.
|Loan Type||Minimum Credit Score||Who sets the score guideline?|
|Conventional||620||Fannie Mae and Freddie Mac|
|FHA||500 with 10% down; 580 with 3.5% down||The U.S. Department of Housing and Urban Development (HUD)|
Some fine print on government-backed loans
FHA loans are the most broadly accessible, as there are no income or geographic restrictions on who can qualify.
VA loans are only available to active-duty military servicemembers, veterans, and some surviving spouses. The VA does not set a hard-and-fast credit score minimum and encourages lenders to consider all facets of an eligible borrower’s finances.
How can I raise my credit score to get a conventional loan?
If you find that you don’t have the credit score needed for a conventional loan, never fear. You can make moves to reach the 620 conventional loan credit score minimum.
- Pay your bills on time. The single biggest factor in raising a credit score is making sure you pay bills on time.
- Pay down your debts. The second biggest factor is paying down your debts. That improves your credit utilization score, which is based on your available credit versus what you’ve used. If you have a credit card with a $5,000 limit and have $4,950 charged, paying it down will eventually drive up your score as long as you keep more than 30% of the balance available.
- Don’t close accounts. Don’t celebrate paying off a credit card by closing the account. That can actually hurt your score! An open-but-little-used account can increase your credit utilization ratio and it lengthens your age of credit.
Keep in mind, though: Slow and steady improvement wins this race. You won’t see any dramatic swings next week, but over time, you can raise it with diligent effort.
Conventional loan minimum credit score FAQs
The minimum credit score for a conventional loan is 620.
You may qualify for a conventional loan with a 640 credit score, since the minimum credit score for these mortgages is 620. With a 640, you may receive lower rates and mortgage insurance costs with an FHA loan. For either loan, lenders look at several factors to determine whether you qualify, including your credit score, income, and debt-to-income ratio. You can apply for preapproval with a lender to find out whether you qualify and how much you may be able to borrow.
Mortgage lenders look at a number of factors to qualify you for a 5% down conventional loan, including your credit score, income, and debt-to-income ratio. The minimum down payment for a conventional loan is 3%, so being able to put down 5% can help your chances, assuming you meet all of the other criteria for the loan program and any additional guidelines set by the lender.
See if you qualify for a conventional loan
To qualify for a conventional loan, you typically need a minimum credit score of 620. But even if your credit score is lower, you may be able to get a mortgage.
A lender can explain your loan options when you get preapproved, and they can help you decide which type of mortgage is best for you based on your finances.
Fairway is not a registered or licensed credit management service provider.
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.