Let’s just say, it’s probably lower than you think. Before the market crashed in 2008, nearly anyone could qualify for a mortgage, no matter how bad their credit. These days, underwriting standards are higher and that means your credit score needs to be as well in order to qualify. However, that doesn’t mean that anyone with a score under 780 is doomed to rent for eternity. According to the FICO Score Distribution of closed, approved loans in September 2016 from Ellie Mae’s Origination Report, there’s a significant portion of homebuyers with scores below 750.
FHA Qualification: 580 Minimum
Many potential homebuyers believe that they need a score over 780 to qualify, and yet about 80% of buyers with FHA loans had a score below 750!
The FHA (Federal Housing Administration) provides mortgage insurance on loans so that your lender can get you a better deal. That means low down payments, low closing costs, and you guessed it – easier credit qualifying. Your down payment can be as low as 3.5% of the purchase price and as a borrower you can have a credit score as low as 580. However, keep in mind that if you have a high debt-to-income ratio, it could still be difficult for you to get a home loan through FHA.
Conventional Qualification: It depends (about 650)
Conventional loans do require a higher credit score, but 36% of homebuyers were still able to secure a loan with lower than 750 credit score according to Ellie Mae’s data.
Determining Your Rate
While you can qualify for an FHA loan with as low as a 580 credit score, you will get a much different mortgage rate than a buyer with a 780 credit score. The better your credit score, the better (lower) mortgage rate you will be offered. Currently average rates stand at 3.52% according to the Weekly Mortgage Watch. That means that if you have a good credit score, you will be able to secure a loan with a comparable rate. If you have a less than stellar score, you could end up paying a much higher rate.
If you haven’t decided which one is best for you, check out our complete price breakdown of FHA vs. Conventional financing. And now here’s another quick breakdown of credit scores and what kind of rate you can secure based on them. You may be paying a higher interest rate, but you can secure a loan without perfect credit.
780 and above– Qualify for the best rate available
700-779 – Qualify for a relatively good rate. It will not be as low as someone with the highest score possible but it will be good.
660-700 – Qualify for an average rate. It won’t be the best rate on the market but you will be able to qualify.
650 and below – May qualify for a higher rate depending on the size of your down payment. Those with a higher down payment are more likely to qualify.
620 and above – Qualify for a mortgage loan with 3.5% down. FHA lending standards not as strict as Conventional loans however lenders are tightening their restrictions.
580-620 – May qualify with a 10% down payment.
Nontraditional Credit – May qualify with 3 valid credit references. If you have limited credit or none at all, FHA will accept 3 positive credit references i.e. consistent utility payments, cell phone bill, gym membership, etc.
If you have more questions about home loans and the buying process, start chatting with a First Team agent. Our experienced local specialists know every step you need to take on the road to homeownership and can answer any questions you have about what to do next.