When you are looking to buy or refinance a home, it is important to know your credit score. Your credit score helps lenders understand how you manage your finances and influences the interest rate they may be able to offer you. Lenders may offer people with higher credit scores lower interest rates. By contrast, people with lower credit scores may need to pay a higher interest rate to get a mortgage.
Different home loan options can have different credit score requirements. The credit score required to qualify for an FHA loan is often lower compared to other loans. Here are some general credit score guidelines.
- VA loans: No minimum credit score required. (Most lenders do have a minimum credit score to approve a loan however.)
- FHA loans: 540 is the minimum credit score typically required.
- Conventional loans: 620 is the minimum credit score typically required.
- USDA loans: 640 is the minimum credit score typically required.
It is important to remember that credit score is one of many criteria which creditors may use to evaluate your loan application.
FHA credit score requirements and down payments
An FHA loan is one of the most affordable mortgages available. With its low down payment and flexible credit score guidelines, FHA loans can make buying a house more attainable for first-time home buyers.
While a minimum credit score of 540 is usually required to get an FHA loan, it is important to note that these loans often come with higher down payment requirements. Borrowers are frequently required to make a 10% down payment with an FHA loan when their credit scores are between 540 and 579. Homebuyers need to have a credit score of 580 or higher to make a 3.5% down payment.
There are other requirements for FHA loans in addition to credit score. These include:
- Debt-to-income ratio. Lenders frequently want your debt-to-income ratio to be less than 43%. This means that your total debt should not exceed 43% of your monthly income.
- Proof of income. While there are no minimum income requirements, you will need to document you have income sufficient to pay your monthly mortgage bills.
- Mortgage insurance. You will need to pay an upfront mortgage insurance fee of 1.75% of the purchase price of the house. This upfront fee can often be rolled into the total loan amount. In addition, you will need to pay annual mortgage insurance premiums that typically cost between 0.45% and 1.05% of the loan amount.
Your chances of getting approved for an FHA loan are better if you have a higher credit score, although people with bad credit or who have suffered from bankruptcy or foreclosure may still be approved. Each lender is different, so you should inquire with a lender about your eligibility.