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What Credit Score Do You Really Need for a Mortgage?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Love it or hate it, your credit score has a big influence over your financial life. Planning to apply for a mortgage in the near future? Your credit score can make or break your ability to qualify for a home loan.

Because your credit score is such an important part of the homebuying process, it pays to understand how lenders view it.

Credit score requirements by mortgage type

When you’re preparing to purchase a home, one of the first decisions you’ll need to make is which type of mortgage is best for you. The condition of your credit score may come into play when you are making your decision.

Here are the minimum credit score requirements for conventional, FHA, VA and USDA mortgage programs:

Mortgage TypeCredit score
Conventional620
FHA500 (10% down payment required)
580 (3.5% down payment required)
VANo set minimum (entire loan profile reviewed instead)
USDA580 (if eligible for a credit exception)
640 (for automatic approval)

Do lenders abide by minimum credit score requirements?

Under most circumstances, lenders will not issue a mortgage if your credit score falls beneath the minimum thresholds listed above. Why not? The answer lies in the secondary mortgage market.

Because lenders are working with a finite budget, it’s common for them to sell the loans they make to another company. Lenders don’t have unlimited funds to keep granting new mortgages to new customers while they wait 30 years for you to pay back your loan. At some point, the lender would run out of money.

To avoid this issue, lenders routinely package up their loans and sell them on what is known as the secondary mortgage market. Larger companies, such as banks or government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, purchase the loans (and often resell them again to investors).

For a GSE or investor to be interested in buying a loan from a lender, the loan has to meet that entity’s minimum score requirements. If a lender issued you a conventional mortgage at a credit score under 620, Fannie Mae/Freddie Mac wouldn’t be interested in buying the loan later. Instead, the lender would likely have to keep your loan on its books until you paid it off, refinanced or until the lender could find another buyer for it.

Lenders don’t want to be stuck with loans on their books. It limits the future mortgages the company can write. As a result, lenders don’t typically write loans for people who don’t meet minimum score requirements.

When it comes to FHA, VA and USDA loans, minimum credit score requirements are firm. A lender couldn’t issue these loans to applicants with lower credit scores, even if they wanted to.

Lenders might require a higher-than-minimum score

If you’re a potential homebuyer with a credit score close to the cutoff point, here’s a bit of bad news: Some lenders may require even higher scores than those listed above in order to approve your mortgage application.

Many lenders have internal policies known as lender overlays. Such overlays often feature stricter credit score requirements. This means that even if your credit score satisfies a mortgage program’s minimum requirement, it might not be high enough to satisfy every lender.

But why would lenders ask for a higher minimum credit score than is required for your loan type? In the end, it comes down to risk management.

Casey Fleming, veteran mortgage adviser in Silicon Valley and the author of The Loan Guide: How to Get the Best Possible Mortgage, offers some insight.

“Each lender has to do its own risk management/profitability equation. Higher risk means a higher cost of servicing loans when a borrower goes into default, which is much more likely at lower credit scores. Typically, lenders will either offer very good pricing but require very high scores, or they will do the opposite.”

Rick Melville, a certified mortgage planner with 24 years of experience, explains that overlays exist because “many lenders desire a higher credit score threshold to provide safety for their portfolio.”

So, although the FHA minimum median credit score requirement may be 580 on loans with a 3.5% down payment, some lenders might choose not to approve loans unless the borrower’s median score is 640 or higher.

How your credit score can affect your home loan

Your credit score has the ability to affect more than whether your loan is approved or denied.

  • Your credit score affects how much interest you’ll be charged for your mortgage. Lower credit scores typically equal higher interest rates. Higher credit scores typically equal the opposite.
  • The size of your down payment may be affected by your credit score.
    Lower credit scores could also equal a bigger down payment requirement to qualify for a mortgage. With an FHA loan, for example, you may qualify for a low 3.5% down payment if your credit score is 580 or higher. Yet if your score falls between 500 and 579, you might have to put up 10% instead (if you can find a lender willing to approve your loan application).
  • Your monthly payment can be influenced by your credit score.
    Naturally, if a lower credit score results in a higher interest rate for your mortgage, you can expect to pay a higher monthly payment than you would have been charged otherwise. But that’s not the only way your credit score can influence the size of your monthly payment.If you finance more than 80% of a home’s value, your lender will likely require you to purchase private mortgage insurance (PMI). For conventional loans in particular, the cost of your PMI premium is influenced by your credit score. In other words, borrowers with lower credit scores pay higher PMI premiums.

Good news: Your credit score is not the only factor that matters when you buy a home

You credit score matters a great deal when you want to buy a house. It is not, however, the be-all and end-all of qualifying for a mortgage. Your credit score is just one piece of the equation.

Lenders look at factors beyond credit score to decide whether to approve your mortgage application as well, including

  • Loan-to-value ratio
    Loan-to-value (LTV) ratio describes the relationship between a property’s value and the size of the loan against it. If the home you plan to purchase costs $240,000 but appraises at $300,000, for example, the LTV would be 80% (loan amount divided by appraised value).A larger down payment could also result in a lower LTV ratio. From a lender’s perspective, the lower the LTV, the better.
  • Down payment size
    Most loans will require that you bring a down payment of a certain size to the closing table. If you can put up a larger down payment, however, you might improve your odds of qualifying or secure a better interest rate for your loan.
  • Debt-to-income ratio
    Debt-to-income (DTI) ratio measures how much of your income is used to pay your debts each month. Lenders calculate DTI by adding up your monthly debt payments and dividing them by your total gross monthly income.The more money you pay out monthly to others, the more likely you are to default on a mortgage. As a result, the less you owe (i.e., the lower your DTI), the higher your odds of being approved for a new home loan.Having money in reserve can also make you a more attractive borrower. Reserves are liquid assets you could tap into to make your mortgage payment if needed, such as

    • Checking accounts
    • Savings accounts
    • Retirement accounts
    • Investments (stocks, bonds, mutual funds, CDs, etc.)
  • Current income and employment history
    To qualify for a mortgage, you need to have a steady job and stable income, and you need to be able to prove that you do. When you apply for a mortgage, lenders will review your pay stubs, tax returns, bank statements and other information to assess your level of risk.Your income is also a key component you should consider personally when you’re figuring out how much house you can afford. Try LendingTree’s home affordability calculator to get a better idea of your ideal home price. LendingTree owns MagnifyMoney.

How to prepare your credit for a mortgage

It’s true that it can be incredibly difficult, often impossible, to qualify for a mortgage with a low credit score. But here’s the good news: With hard work and a little patience, credit scores can be improved.

Check out the following tips on how you can work to get your credit score where it needs to be.

Review your three credit reports. Your credit scores are based upon the information found in your credit reports from Equifax, TransUnion and Experian. Unfortunately, despite your creditors and the credit bureaus’ best efforts, credit reporting mistakes can sometimes happen.

If a mistake winds up on your credit reports, it can damage your credit scores whether the information is accurate or not. The only way you can be sure the information on your three credit reports is accurate is to review them yourself.

Federal law gives you the right to get a free copy of your three credit reports every 12 months via AnnualCreditReport.com.

Melville advised, “Pull the credit now if you’re planning to apply for a mortgage any time soon. It can help to know what you’re dealing with in advance.”

Correct errors on your credit reports.

Should you discover errors on your credit reports, federal law gives right to dispute those mistakes with the credit bureaus. According to the Fair Credit Reporting Act (FCRA), when you dispute an item on your credit report you disagree with, it has to be investigated.

If a credit bureau can’t verify the disputed information as accurate, the item in question must be fixed or removed from your credit report entirely, usually within 30 days.

Pay down your credit cards

Reducing your credit card debt might be another effective way to give your credit score a boost. According to FICO, you should aim to keep your balances low on credit cards and other revolving debt.

High outstanding debt can affect your score in a negative way. With credit cards specifically, using a high percentage of your available credit can indicate that you’re overextended and more likely to make late payments. Your credit scores can suffer as a result.

On the flip side, if you pay those balances down, you could be doing your credit scores (and your wallet) a big favor.

What’s next?

If you think your credit may be strong enough to qualify for a mortgage, the next step is to shop around and find the best loan offer available.

Fleming recommends to start by “meeting with an experienced, competent, ethical mortgage adviser before you go shopping for a home.

Even if you’re unsure about your credit scores, speaking with a mortgage professional might be helpful.”

He added that “reasons for low credit scores vary dramatically. Many folks find they actually hurt their scores when they try to improve them. A good mortgage adviser should be able to tell you whether your score is an issue or not, how much of an issue it is, and what would help you the most in bringing your score up (assuming you need to).”

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Michelle Black
Michelle Black |

Michelle Black is a writer at MagnifyMoney. You can email Michelle here

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Life Events, Mortgage

How Credit Report Disputes Can Sabotage Your Chance for a Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. Based on your creditworthiness you may be matched with up to five different lenders.

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Mortgage underwriting can feel like it’s taking a lifetime when it’s standing between you and your dream home. But your lender wants to make sure that you’ll be able to repay the loan, so they’ll take the time to go over your credit history with a proverbial magnifying glass.

Before you get to underwriting, you’ll want to make sure you’re a creditworthy borrower. This means maintaining a good payment history, paying down debt and disputing any errors on your credit report.

However, credit report disputes can impact your ability to get a mortgage if they’re still pending when you’re applying for a loan. This guide will explain how and why.

Why your credit reports and scores matter

One of the first things lenders look at is your credit report, which provides information about your credit history. It details whether you’ve made on-time payments on credit cards, loans and other accounts.

The information included in this report is summed up by a credit score that generally ranges between 300 and 850. The higher your score, the more creditworthy you are perceived to be.

Although credit scores aren’t the only factor that determines whether you’ll qualify for a mortgage, your credit score heavily influences the mortgage interest rate you receive. The highest scores qualify borrowers for the best mortgage rates.

Before you begin the homebuying process, it’s smart to review your credit report and have a copy handy. You can request a free credit report once a year from each of the three major credit reporting bureaus, Equifax, Experian and TransUnion, at AnnualCreditReport.com.

It’s critical to arm yourself with this information in advance. That gives you the opportunity to dispute any inaccuracies you’ve discovered and clean up your report.

What is a credit report dispute?

Credit report inaccuracies are relatively common. Inaccurate information can happen for a variety of reasons — a credit card payment being applied to the wrong account or duplicate accounts in your report giving the impression that you carry more debt than you actually do, for example.

Not only can errors harm your credit score, but they can prevent you from qualifying for a new credit account, such as an auto or home loan. That’s why it’s important to regularly keep track of the information found in your credit reports.

When you review your credit report and find an error, you have the opportunity to formally dispute it under the Fair Credit Reporting Act This is the first step to take to get the error corrected or removed.

Fortunately, it’s easier than ever to file a credit dispute with all three credit reporting agencies online.

How to file a credit report dispute

If you’ve found an error on your credit report, take the following steps to dispute it:

  1. Provide your contact information.
  2. Identify the items in your credit report that are inaccurate.
  3. Explain why you’re disputing the info and include documentation to support your dispute.
  4. Request a correction or deletion.

You’ll also want to reach out to the creditor that is reporting inaccurate information to the credit bureaus. Let them know you’re disputing the information and provide them the same documentation you’re giving to the bureaus.

In many cases, the credit bureaus investigate disputes within 30 days, according to myFICO.com.

However, many disputes can go unresolved for long periods of time, which can be troublesome for consumers applying for a mortgage. Many loan applicants don’t realize an open credit report dispute can raise a red flag to lenders and may even prevent mortgage approval.

When to file a credit report dispute

You’ll want to file a dispute as soon as you spot an error on any of your credit reports, but if you’re thinking about buying a home in the near future, it’s best to exercise caution when filing disputes, especially right before you apply for a mortgage.

Although the dispute investigation can wrap up in 30 days, it could last as long as 90 days, so it’s best to avoid filing new disputes a few months prior to starting the homebuying process.

How mortgage lenders view credit disputes

When a dispute is filed, credit reporting agencies are required to label the item as “in dispute.” The dispute itself doesn’t impact your FICO Score. However, your score may temporarily deflate or inflate while the disputed items are being investigated.

Mortgage lenders know credit reports with disputed items don’t paint the most accurate picture of a consumer’s creditworthiness and many require this status be removed before approving a mortgage application. This leaves some consumers with a difficult decision to make — accept costly credit report errors or delay applying for a loan until disputes have been resolved.

Here’s how lenders who provide conventional and FHA loans consider credit report disputes when determining whether a consumer qualifies for a mortgage.

Conventional loans

Both government-sponsored enterprises, Fannie Mae and Freddie Mac, have automated underwriting systems that alert lenders to existing credit report disputes. These entities don’t issue loans, but buy mortgages from lenders that follow their rules.

Fannie Mae’s system initially reviews all accounts on a borrower’s credit report, even those that are being disputed. If the borrower would be approved for the loan even with the account in question, the loan moves forward. But if the disputed account would push the borrower into the “rejection” category, the system will direct the lender to investigate whether the dispute is valid.

Lenders using Freddie Mac’s system are required to confirm the accuracy of disputed accounts. The borrower would need to have the accounts corrected before the loan can move forward.

FHA loans

FHA-approved lenders require borrowers with disputed delinquent accounts on their credit report to provide an explanation and supporting documentation about their dispute. If the account has an outstanding balance of more than $1,000, the loan must be manually underwritten, which means the loan officer has to review the loan application and supporting documents outside of the automated system.

The loan officer goes over the paperwork included in the borrower’s file very closely to determine their risk of mortgage default and whether they qualify for the loan program that they’re applying.

Disputed medical accounts are excluded from consideration, but disputed accounts that are paid on time must be factored into the borrower’s debt-to-income ratio.

How to remove a lingering credit report dispute

Gaining access to a new credit report with updated information is not an option for the borrower if the creditor won’t correct the information. And when a consumer files a complaint with the credit reporting agencies, the agencies will often defer to the creditor.

Just as you’ve reached out to your creditor and the credit reporting bureaus to file your dispute, you’ll want to take the same action to remove it. Contact the creditor directly and request that they update the account information to show that it’s no longer being disputed.

You may also want to reach out to Equifax, Experian and TransUnion to request dispute removal, but keep in mind they may also reach out to the creditor who is reporting the disputed account. See the FICO website for more information about contacting each bureau’s dispute department.

The bottom line

Dealing with an unresolved credit report dispute can turn into a consumer nightmare. Even if you’ve followed best practices, you may still be unhappy with the results.

Fortunately, you can still submit a complaint to the Consumer Financial Protection Bureau. They will forward your complaint directly to the company in dispute and work to get a response from them. Another option is to seek guidance from a consumer advocate or an attorney. The National Foundation for Credit Counseling may be a helpful place to start.

Credit reports and scores have such a strong influence on lifelong financial health, so the most effective defense is to be proactive about making sure yours are in the best shape possible. Regularly monitoring your credit profile and working to fix inaccuracies before applying for a mortgage is a good game plan to prevent major problems as you embark on the homebuying process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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