Minimum Credit Scores for Conventional and FHA Mortgages

Minimum Credit Scores for Conventional and FHA Mortgages

The minimum credit score you'll need to get a mortgage is going to vary widely depending on a lot of conditions. How much of a down payment you have, how expensive is the house, what type of loan are you securing and other factors are going to come into play.

While there are multiple types of loans most people are going to be deciding between an FHA loan or a conventional loan. Both have different requirements when it comes to your credit score. They will also will come with different stipulations, fees, insurance, interest rates and a whole slew of other things to consider.

What is Your Credit Score?

We all understand that we have a credit score but not all of us pay much attention to it. Most of us probably check it once a year just to make sure nothing erroneous has occurred or to find out what our interest rate might be when we're buying a new car.

You have the right to receive a free copy of our credit report each year from all three credit bureaus but when you're buying a house you'll want to keep a closer eye on it.

Experian, Equifax and TransUnion all have different formulas when determining your credit score. While they won't vary too much they all will be slightly different. When you're checking your credit, you'll need to check all three.

When looking at your credit reports you'll want to make sure that everything is as it should be. If there are any errors or misreported items than you'll want to make a request to that agency to have it investigated as soon as possible.

Once you know what your credit score is you'll have a much better idea of what type of loan you should get. There are upsides and downsides to both conventional and FHA depending on your credit score so check out the differences and see what's right for you. 

Conventional Loan: Minimum Credit Score

The credit score you need to secure a conventional mortgage is going to vary by lender but the lowest is usually near 620. The three credit reporting agencies are going to have slightly different numbers but two out of the three will need to be about 620 or higher.

Even with a credit score above 620 there are going to be some caveats. If your credit score is below 740 then your lender will likely require you to carry private mortgage insurance (PMI) especially if you don't have a lower down payment. If you can put down 20% on your home that may lower or even eliminate PMI otherwise you will almost certainly be required to carry it.

PMI, depending on your credit score and down payment, will be somewhere between .20% and 1.50% of the amount of the loan every year. Luckily once the equity amount of the loan gets down to 80% of the current market value of the home you'll be able to stop carrying private mortgage insurance. 

Because your mortgage is weighted so that you pay more interest in the beginning you won't make much of a dent in it at first. But if the value of your home increases, and it likely will, you'll be able to stop carrying PMI as soon as you hit that 20/80 ratio.

There are a lot of factors that go into your mortgage eligibility when applying for a conventional loan. Your debt to income ratio, down payment and other factors will all have an effect. Credit score requirements also vary depending on your mortgage lender. If you’re looking for a conventional loan it’s a good idea to apply with several mortgage lender. Not only are you more likely to get approved but you’ll also be able to choose from the best rates and the best terms. 

FHA Loan: Minimum Credit Score

FHA loans are typically considered by those with lower credit scores or less money for a down payment. For first time home buyers, an FHA loan, one backed by the Federal Housing Authority, are ideal.

If you don't have equity built up in an existing home and don't have a large down payment for your first house finding a lender willing to take a chance on you, without gouging you with fees and high interest rates, can be challenging.

One of the main benefits of an FHA loan is the credit score requirement. With an FHA backed loan, lenders can offer you competitive rates on a mortgage even if your credit isn't that great. You also are not required to have a huge down payment, especially if your credit isn't that bad.

With an FHA mortgage, if your credit score is below 620 you can still get a loan. Even if it's a little above 620 the terms of an FHA loan may still be better than a conventional mortgage.

If your credit score is between 580 and 620 you'll be required to put down at least 3.5% as a down payment. That's not bad considering that most conventional loans require at least 5%. FHA loans are even available to those with a credit score below 580, but your down payment requirement will jump to 10%.

As with everything in life though, there is a catch. You will be required to pay mortgage insurance in two parts, up front and annual. Upfront mortgage insurance with an FHA loan is 1.75%. That can be rolled into the mortgage but you'll have to pay the entire amount over the life of the loan.

The second annual rate is 0.45% to 0.85% depending on the length of the loan and your down payment amount. This can be a big ask but the benefits of owning a home and the equity that you build can outweigh the costs.

Getting a loan through an FHA approved lender and backed by the FHA has enabled millions of people to buy a home that would otherwise not be approved.

Bottom Line

While there are other types of loans out there, conventional loans and FHA loans are by far the most popular. There are definitely advantages and disadvantages to both types of loans. One of them is likely right for you. 

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