Everything You Need To Know About Credit Score For Mortgage

Your credit score is the most crucial measure of your creditworthiness. At a glance, your credit score speaks a lot about your payment history. It’s a number between 350 to 850 that fluctuates based on your credit activity. 

If you miss your loan payments or forfeit them, your credit score will drop. But, conversely, your credit score will increase if you make a balloon payment against your loan. 

There isn't a specific credit score for a mortgage because there isn't one type of credit score. 

In this blog post, we will explain everything you need to know about the credit score for a mortgage. So, keep reading to enhance your financial knowledge. 

Credit Score for Mortgage

When you apply for a mortgage, lenders will consider your credit score, which will help them decide whether you are a risk worth taking. The higher your credit score for a mortgage, the lower the interest rate is applicable against your borrowed amount. 

Optimum Credit Score for Buying a House

A house loan, better known as a mortgage, is a long-term loan that runs for more than 10 years. 

For most types of loans, the credit score for buying a house stands at 620. However, this number isn't a hard and fast rule, and it’s best to have a higher credit score. For example, if your credit score is 740 or above, you'll get the lowest interest rates.

What's the Minimum Credit Score for a Mortgage?

According to financial experts, the minimum credit score for a mortgage depends on the type of loan — conventional or government-backed — and the lender. You won't find a universal credit score for mortgage loans. 

Here are 2021 minimum credit scores for a mortgage loan, based on the loan types: 

Can You Qualify for a Mortgage With a Bad Credit Score?

Fortunately, there are several programs for buying a home with bad credit. First, however, you'll need to make a handsome down payment and show you have a low debt-to-income ratio. 

Many consumers are at the bottom of the food chain with a credit score below 600. 

What Is Bad Credit?

Your credit is considered bad if you have a history of not paying bills on time or owe too much money. In addition, due to your lower credit score, you will represent a higher risk to lenders.

Typically, a bad credit score is between 300 and 580. It means you missed your payments or have defaulted on a loan. It causes a ripple effect that decreases your chances of getting a house loan. Plus, it creates several obstacles in your financial life. 

500 Credit Score Mortgage Lenders

If your credit score is low, but your income is high, you can secure a mortgage with your 500 credit score. This is because there are lenders who understand that it’s not easy to increase your credit score. 

These are the top eight lenders that will provide mortgage financing if your credit score is as low as 500:

1. Citadel Servicing
2. Angel Oak Mortgage Solutions
3. Carrington Mortgage Services
4. Athas Capital
5. Northstar Funding
6. A&D Mortgage
7. ACC Mortgage
8. HomeBridge Financial

Please note that there is no guaranteed mortgage with no credit check. 

What Factors Do Mortgage Lenders Consider?

A good credit score alone will not make you a good candidate for a home loan. Yes, lenders consider credit score when you apply for a mortgage, but they also take other factors into account. 

The specific requirements for a mortgage vary depending on the lender. For instance, the Federal Housing Administration provides loans for homeowners with lower-than-average credit scores. The government intervenes to mitigate the risk for the lender. However, there is a set criterion to qualify for FHA loans. 

Here are some key factors for mortgage approval. 

Your Credit Score 

Your credit score is the first thing the financial institution will check before approving your loan request. Analyzing your credit scores helps lenders determine whether you are a risk they are willing to take. For example, if you miss your loan payment, your credit score will drop, and banks will be less interested in working with you. 

Since credit scores are constantly fluctuating, banks and other lending institutions have certain criteria for credit scores. If your credit score is low, you will be charged higher interest rates. So you should increase your credit score before applying for a house loan.

Down Payment 

Down payment is a significant amount of money you pay upfront for expensive items/services. This amount is usually determined on a percentage basis. For instance, you may pay around a 3%–8% down payment on your house loan. Your bank will check your down payment to determine how much money it should lend you. 

Ideally, you should make a 20% down payment. However, some lending institutions will approve your loan request with a 3%–5% down payment. 

In addition, FHA loans allow as low as 3.5% down payment, while VA loans don't require down payment at all. 

Employment History

Mortgage lenders will check your proof of employment to ensure you have a stable income to pay back the amount you borrowed. You need to show that you have worked for at least two years before applying for a loan. If you don't have an employer, you need to prove your source of earnings, such as disability benefits. 

Savings and Investment Accounts

Some lenders may ask to see your savings and investment account. This reassures them that even if you lose your job, you’ll still be able to continue with your payments until you get back on your feet. If you don’t have much savings, you may have to pay a higher interest rate.

Debt-To-Income Ratio

The debt-to-income ratio is the amount of debt you have compared to your gross monthly income. For instance, if your student loan, car loan, and mortgage payments total up to $1,500/month and your income is $5,000, your debt-to-income ratio is 1,500/5,000, that is 30%. 

The debt-to-income ratio is a strict measure of your loan repayment. For example, some lenders might allow up to 43% DTI ratio, but others might cap it at 36%. Regardless of the restriction laid out by your lender, it's for your own financial benefit to cap your DTI at 35%. 

If your debt-to-income ratio is over 50%, you should try to lower the number of debt obligations. 

How Far Back Do Mortgage Lenders Look at Late Payments?

There is no straightforward answer to this question. It depends on your lender. For example, some financial institutions look back up to six years, while others check the last three years. If you wonder how far back mortgage lenders look at credit history, the answer is the same. 

What Is the Minimum Credit Score for an FHA Loan?

FHA is a federally backed housing loan service for people with poor credit scores. In 2021, the minimum credit score for an FHA loan is 580. 

What Credit Score Is Needed for a USDA Loan?

USDA loans are low-interest loans issued by the government to financially assist low-income earners in rural and suburban areas. USDA loans don't require any down payment and are designed to spur property sales. 

In addition, the USDA loan system doesn't have a fixed credit score. However, you will need a credit score of 640 to be eligible for automatic approval through the USDA's automated loan underwriting system. 

VHA Loan

A VA loan is a mortgage loan for veterans, service members, and their surviving spouses. VHA or VA loans require no down payment and offer better interest rates. This mortgage program was established by the US Department of Veteran Affairs, and it's operational. 

Can You Get a VA Home Loan With a 500 Credit Score?

Most mortgage companies will require a credit score above 620. However, according to the VA loan credit score requirements 2021, you can get a house loan with a 500 credit score. Moreover, if you have enough residual income, you can qualify for an above 60% debt-to-income rate. 

What Credit Score Does the VA Require?

Many veterans and their surviving spouses are wondering, "What is the minimum credit score for a VA loan?" Typically, VA loans don't have a credit score requirement. However, VA lenders do. While some lenders require a credit score of 640, others may offer a minimum of 620. 

Is It Hard to Get Approved for a VA Home Loan?

VA loans are relatively easy to qualify for. There is no down payment required, no minimum credit score, and no limit on how much you can borrow. The process of getting a VA loan is also straightforward. 

Jumbo Loan

A jumbo loan, or better known as a jumbo mortgage, is a unique type of house loan that exceeds the value set by the Federal Housing Finance Agency. These loans have gained traction as the housing market recovers from the Great Recession.

Unlike a conventional mortgage, jumbo loans cannot be guaranteed, purchased, or securitized by Fannie Mae or Freddie Mac.

The jumbo mortgage is designed to finance luxury properties in highly competitive areas. In addition, these loans have unique underwriting requirements and tax implications. 

Jumbo Loan Down Payment Requirements 2021

As a general rule of thumb, you must make at least a 10% down payment on your loan. Some lenders may require a 20% or even 30% down payment. However, a 20% down payment is a good benchmark. 

What Is the Fastest Way to Raise Your Credit Score to Buy a House?

The minimum credit score to buy a house depends on the type of loan you are applying for. However, it’s always best to boost your credit score before you apply for a mortgage loan. 

For example, houses in California are comparatively expensive; therefore, the credit score to buy a house in California is above 600. 

You can increase your credit score by following our tips mentioned below: 

1. Pay all bills on time
2. Use less of your available credit card limit
3. Check your credit reports
4. Use a secured credit card
5. Add to your credit mix

Does Mortgage Prequalification Hurt Your Credit Score?

As long as you only share your estimated credit score or the lender checks your credit score with a soft pull, your credit won't be affected.

Final Thoughts

Getting a mortgage loan in the USA can be difficult because mortgage lenders consider several financial factors, such as your credit score and the value of the property you are interested in. 

Sometimes your request might get turned down. However, don’t give up and try your luck with other mortgage lenders. In the meantime, work on raising your credit score.