When it comes to qualifying for a mortgage, your credit score is everything.
If your credit score is below the minimum cutoff, you will be rejected. But even if you are approved, your exact credit score will have a big impact on the total cost of your mortgage. The higher your credit score, the lower the interest rate you will pay.
The vast majority of mortgages in America are either "conventional" (which means the mortgage will be purchased by Fannie Mae or Freddie Mac) or "FHA." If you are applying for a conventional or FHA mortgage, this post applies to you.
We will explain:
- Which version of FICO will be used to determine your score
- Which credit score will be used when your score differs by bureau
- Which credit score will be used if you have a co-signer with a different score
- What minimum credit score you must have in order to qualify and what scores generally get the best interest rates
- Why you could still be rejected even if your score is above the minimum required
- What to do if you don't have a credit score
Which Version of FICO Will Be Used
There are a lot of "free credit scores" available. You might see your "official FICO" on your credit card statement, or you could be a customer of Credit Karma. Unfortunately, none of these scores are being used by conventional or FHA mortgage lenders. Ironically (and almost shockingly), older versions of FICO are still being used to make lending decisions. The version of the FICO score depends upon the credit bureau, and most lenders will pull reports from all three bureaus. Here are the scores you need:
- From the Equifax credit bureau: FICO Version 5 (also called Equifax Beacon 5.0)
- From the Experian credit bureau: FICO Version 2 (also called Experian/Fair Isaac Risk Model V2SM)
- From the TransUnion credit bureau: FICO Version 4 (also called TransUnion FICO Risk Score, Classic 04)
The only way to get access to the credit scores used by mortgage lenders is to purchase your credit score from FICO. For $59.85 you can make a one-time purchase of all of your credit scores, including the relevant mortgage scores at myFICO.com. This is a steep price to pay, and for many people it is not necessary. Although the VantageScore (available at Credit Karma) and FICO Version 8 (which many credit card issuers share) are not the exact scores used in mortgage lending, they can be useful. If your credit score is above 740 on all of your "free" scores, you can feel highly confident that your mortgage scores will also be above 740. However, if your score is below 740, you might want to invest in knowing exactly what mortgage lenders will see.
Although FICO has made enhancements with each new credit scoring model (for example, there is now a FICO 9), the general rules have not changed. You will have a good score if you make your monthly payments on time, keep your credit card balances and utilization low, and avoid collection items and judgments. (You can learn more with our credit score guide).
What If My Score Differs Between Bureaus?
There are three national credit bureaus: Equifax, Experian, and TransUnion. Sometimes creditors or collection agencies do not report to all three bureaus. As a result, your credit score could be different at different bureaus. For example, a collection agency might have registered a collection item on only one credit bureau. As a result, your score could be 750 on one bureau (without the collection item) and 650 on the other bureau (with the collection item).
The rules are relatively simple:
- If the mortgage company pulls a credit report from all three credit bureaus, it will use the middle credit score (not the lowest or the highest score). For example, if you have a 650, 680, and 710 across the three bureaus, the middle score of 680 will be used.
- If the mortgage company only pulls two credit bureaus, the lower credit score will be used.
Most mortgage companies will not tell you their methodology. The only reason a mortgage company would limit the number of credit bureaus it uses is to save on costs. And it would not be in the interest of a mortgage company to advertise that it "does not pull from Experian." If it did advertise that way, people with something to hide on the Experian credit bureau would apply in droves.
What If I Have a Co-Signer?
When two people apply for a mortgage, the rules are simple: the lower credit score is used.
A credit score will be assigned to each borrower, using the methodology described in the previous section (the middle of three scores or the lowest of two scores). The lower of those two scores would then be used.
Imagine two borrowers had the following scores:
- Borrower A: 660, 680, and 700
- Borrower B: 710, 720, and 730
Borrower A's score would be 680 (the middle score), and Borrower B's score would be 720 (the middle score). For the purpose of the loan application, the lower of the two scores would be used. So the official credit score for this application would be 680.
What FICO Score Do I Need to Qualify?
Each agency (Fannie Mae, Freddie Mac, and FHA) sets its own minimum credit score requirements. If your score is below the minimum, you will be rejected. However, having a credit score above the minimum does not mean you will automatically be approved. You will still have to pass other credit criteria (for example, debt burden and other rules).
Here are the minimum credit scores required by agency:
- Fannie Mae and Freddie Mac: minimum credit score of 620.
- FHA: minimum credit score of 500 with a 10% down payment. Once your score is above 580, you only need a 3.5% down payment.
In order to have the lowest rate, you will want your credit score to be above 740 and your LTV — loan-to-value ratio — to be below 60%. However, regardless of LTV, the lowest interest rates tend to go to people with scores above 740.
Lower credit scores become even more expensive when you have a smaller down payment. For example, if you have a 30% down payment and a 620 credit score, you would pay 1.25% more than someone with a 740 credit score. However, if you only have a 10% down payment, a 620 credit score will have a 3% higher interest rate than someone with a 740.
If you have a low credit score and a small down payment, it almost always pays to wait. Increase your down payment (by saving) and improve your credit score before applying, because the savings can be significant.
3 Reasons You Can Still Be Rejected for a Mortgage Loan
You might have a great credit score, but your mortgage application could still be rejected. Here are the three main reasons why:
- Many mortgage lenders have stricter requirements than the "minimum" set by the mortgage agencies. The government agencies (Fannie Mae, Freddie Mac, and FHA) set minimum standards. As a mortgage company, so long as your mortgages meet those minimum standards, you can sell the mortgages to the agencies. However, if too many borrowers of a mortgage company default, the government agency can stop working with the mortgage company. Even worse, the agency could sue the mortgage company. So (especially after the 2008 crisis), most mortgage companies have minimum score requirements that are a bit higher than the minimum. For example, one of the lowest FICO requirements for FHA mortgages is 540, even though — technically — a 500 score is allowed.
- Mortgage lenders set other credit policy rules. If your credit score is low because you don't have a lot of history, you have a much better chance of being approved. However, if your credit score is low because you have a lot of negative marks on your credit report, it will be a lot harder to get approved. For example, a lender could have a minimum credit score of 640, but will not approve anyone who was 60 days or more delinquent in the last year. If your score is 640 because of a 60-day late payment, you are still out of luck.
- Down payment, verification, documentation, and all of the other requirements can still stop you. Just because you have a good credit score and pass all of the credit policy rules, there are still a number of other hurdles you need to jump over. You need to prove that you have sufficient income to handle the payments. You will need to have a down payment and sufficient reserves. And you will need to have a lot of documentation, especially if you are a freelancer.
You should think of the credit score as the minimum, first requirement. But don't celebrate once you have the required score — there is still a lot more to do.
What If I Don't Have a Credit Score?
If you do not have a credit score, you can still qualify for a mortgage. Just remember: there is a big difference between a bad score and no score. No score means that there is not sufficient information on your credit report to generate a credit score.
There is a special, manual underwriting process for people with no credit score. In general, you will have a higher burden of proof for both your income and your payment history. That means you will probably have to document proof of up to two years of income, and you will need to be able to document proof of payment. Some acceptable forms of payment history would include:
- Rent payments made on time
- Utility bill payments made on time
- Phone or cable bills made on time
There are mortgage companies that specialize in helping people with no credit score. However, the best rates and easiest processes are available to people with scores above 740. If you want to start building your credit score now, open a secured credit card.