Minimum credit score for mortgage

[Ines]

Is there a minimum credit score for mortgage? I’m planning on buying a home some time in the next year, and I don’t want to find out at the last moment that I don’t qualify.

To start with, I’ve pulled my 3 in 1 credit score from myFico. It’s 650, 655 & 662. Do I need to improve my Fico scores to qualify, or am I actually doing OK?

[Tracy Winters]

Usually 640 for a standard mortgage, 500 for an FHA

You won’t get a straight answer for this question, simply because there isn’t one. It depends on the type of loan you choose, the lender you use and how well you qualify in other areas.

The traditional minimum credit score for mortgage used to be 620 for many years. But in 2010 a lot of lenders have increased their minimum to 640. This is for traditional loan that doesn’t receive any form or government backing.

You will need a minimum credit score of 680 in order to qualify to Fannie Mae or Freddie Mac programs. If your score is between 620 and 680 you will need to come up with at least 20% down payment, or look into an FHA loan.

Fannie Mae and Freddie Mac used to offer mortgages to people with credit scores below 620, but most of those programs are long gone.

For an FHA loan, which is a loan that is insured by the government, the required minimum credit score for mortgage has also been raised to 500, but that’s only good enough to qualify for financing. As of 2010 you will need a minimum score of 580 if you want to take advantage of the 3.5% down payment, which is the biggest benefits of an FHA loans.

If your score is between 500 and 580, you are not eligible to the FHA’s maximum financing option, and would need to come up with at least 10% down payment.

That being said – it may be very difficult to find a lender that will actually approve you with a score of 500 or 580, because most lenders apply stricter requirements than the FHA guidelines. So in practice you may be required to a minimum score of 600, 620 or even 640 even for an FHA loan.

People should also be aware that mortgage companies use a special Fico formula called Factual. Only lenders can see your Factual Fico score, which is usually lower than the ‘Standard’ Fico scores that you can get at sites like myFico or at the credit bureaus. The only way you can see your ‘Factual’ Fico score is by actually applying for a mortgage and having the mortgage officer pull it in his system.

Minimum credit score for mortgage by itself is not enough and doesn’t guaranty loan approval. While up to 2010 a credit report with one or more derogatory items would be considered acceptable, today lenders expect a clean report for a standard mortgage approval.

For an FHA loan, people with old derogatory items may still be considered, but they will have to demonstrate that past credit problems are resolve. In particular:

• Late payments (more than 30 days) on rent or mortgage payments are not acceptable.
• A person must have no more than 1 to 2 payments on revolving credit (e.g. credit cards) and none more than 60 days past due within the past two years
• People with past bankruptcies or foreclosures may be considered, provided the reasons were valid and the applicant has shown a good faith effort to reestablish credit (this means 2-4 years of rebuilding credit).

Another thing to keep in mind is that lenders will also look at your income to debt ration, the size of down payment you can come up with, your other debts, your ability to cover closing costs and your employment history.

Lastly, keep in mind that there are exceptions to any rule. A person with a Fico score of 615 but with very little debt who can come up with a large down payment might still get approved, while a person with a Fico of 640 but with mountain of debt might get rejected.

Because of this, having a score that is above the minimum credit score for mortgage doesn’t guaranty anything. The only way to know for sure if you qualify for a loan is to actually apply for one. Only a lender can tell you if you meet their standards.

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