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Minimum Credit Scores

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Credit Score Requirements forHome Loan Programs

The largest concern most people have when looking to purchase a homeis what program they will qualify for given their credit score. It is nosecret that credit has been given a very important role in the applicationof any financial product, but when it comes to the mortgage, it isessential. Not every program has a cut and dry minimum credit score,but the guidelines are easy enough to understand to help you figure outjust where you are going to end up in your quest to become ahomeowner. As you navigate the world of mortgages, you will see thatthere are many different types of programs to choose from aside fromthe varying interest rates and fees that pop up. Among the mostcommon mortgage programs are conventional loans, subprime loans,FHA, and VA loans.



Credit Score Guidelines forConventional Residential Mortgages

The most popular and typically most sought after loan is the conventionalloan and with good reason. This loan offers you the ability to have accessto the lowest rates and fees as well as the best terms. Conventional loans,however, are reserved for those with the best credit score and credithistory. It is also reserved for those that are going to put money down onthe home as the highest program conventional loans offer is theConventional 97, which as the name suggests, requires a 3% downpayment. Because these programs offer the lowest rates and mostreasonable fees, they also have the highest credit score minimums inorder to qualify for the program.



In general to qualify for a conforming loan, your credit should fall intoone of the following categories:

Greater than 75% LTV and No Monthly Reserves

With a debt ratio less than 36%, the minimum credit score is680With a debt ratio greater than 36% and less than 45%, theminimum credit score is 700

Greater than 75% LTV and 6 Months of Reserves

With a debt ratio less than 36%, the minimum credit score is660



Greater than 75% LTV and 2 Months of Reserves

With a debt ratio greater than 36% and less than 45%, theminimum credit score is 680

Less than 75% LTV and 2 Months of Reserves


These figures are all based on a primary residence. If you are purchasinga second home, such as a vacation home or an investment home that youare going to rent out or sell after fixing it up, the credit score minimumsdiffer slightly, although the remaining stipulations remain the same.



Conventional Mortgage Qualificationsfor Second Homes

Greater than 75% LTV with 2 Months of Reserves

With a debt ratio less than 36%, the minimum credit score is 680

With a debt ratio greater than 36% and less than 45%, the

minimum credit score is 700





Less than 75% LTV with 2 Months of Reserves

With a debt ratio less than 36%, the minimum credit score is 640

With a debt ratio greater than 36% and less than 45%, the minimum

credit score is 660

Less than 75% LTV with 12 months of Reserves




Investment Home Conventional Guidelines







As you can see, the credit score incrementally decreases as thecompensating factors for the loan increase. The more reservesyou have on hand, the lower the credit score requirementsbecome. The same is true for the debt ratio – the lower the debtratio, the lower the required credit score to qualify for aconventional mortgage.



FHA Mortgage Credit Score Requirements

FHA mortgages used to be known as the first-time homebuyersmortgage, but today it is so much more. Anyone can obtain an FHA loan,whether they have owned a home before or not. As long as you meet therequirements, which are easier to qualify for than a conventionalmortgage, you can be a good candidate for this loan program which isbacked by the FHA. The thing to know about FHA mortgages is that it isnot funded by the FHA, which means that the qualifications for eachmortgage are generally set by the FHA as they will not back anunqualified loan, but the main requirements are set by the bank itself asthey are the ones funding the loan and/or selling it on the secondarymarket.



The minimum credit score for FHA loans is twofold: if you want tobe able to put down the minimum down payment of 3.5%, you willneed a credit score that is higher than 580. If you have a score lowerthan 580, you may still be eligible for an FHA loan, however, youshould expect to put down at least 10% on the home in order toobtain the loan. The lowest score that is allowed for an FHA loaneven with a 10% down payment is 500. Any score lower than thatwill not be eligible for the FHA program.



Aside from the minimum credit score required by the FHA, is theimportance of your credit history itself. In particular, the FHA isconcerned with your housing history, whether it reports on yourtraditional credit report or you have a rental history. If you have anylate payments in the last 12 months on your mortgage or rent, you willbe ineligible for an FHA loan, regardless if you meet the minimumcredit score requirements or not. The only exception to that rule is ifyou had any type of special circumstances, such as a serious illnessor injury that made it impossible to work or your company closed andyou lost your job. As long as you have recovered from the incidentand have improved your credit history since then, the one-time latepayment may be able to be overlooked.



VA Mortgage Credit Score Requirements

VA mortgages are reserved for those that have served our country. TheVA has specifications regarding the length of time you must serve inorder to qualify, which you can find here. If you meet the requirementsand are able to get your Certificate of Eligibility (COE), you then have toqualify for the loan with your financial credentials, which is very easyto do because the requirements are much more relaxed thanconventional loans. VA loans, like FHA loans, are not funded by thegovernment, but are rather backed by it. This means that theyguarantee a portion of your loan should you default on it. This makes iteasier for banks to provide funding to our veterans, even if they do nothave very high qualifications for a loan.



As a general assumption, most lenders will not allow a VA loan with a creditscore that is below 620. Of course, like any other loan, there are lendersthat will take credit scores slightly lower as long as there are compensatingfactors and there are lenders that will require even higher credit scores toqualify. Because VA loans can offer up to 100% financing, it is a risky loanfor the bank, which makes them a little pickier on who they provide fundsto, but the guarantee from the government does help to offset that riskslightly. What VA lenders want is a financial picture that promotes security.They want a borrower that has a low debt ratio, reserves, and stableincome. If that is the case and the credit score is slightly lower than that620 minimum, they might grant an exception. On the other hand, aborrower with a low credit score, high debt ratio, no reserves, and a fairlynew job will not represent a secure borrower and will likely not getapproved despite the guarantee offered by the government. Every lender isdifferent, so shopping around is crucial.



Subprime Loans for Bad Credit Borrowers

Subprime loans used to have a bad rap – they were the loans thatirresponsible people got when they were shopping for a home. Theywere also the loans that let people get away with no documentationand stated income. Today, subprime loans have a completely differentreputation. They are harder to obtain and do not charge obnoxiousfees or rates because they are regulated by the Ability to Repay Rulethat governs every mortgage that is given to a borrower.



Today, subprime loans are affordable and do not provide you with termsthat could harm you in the future. You will not be stuck with an interestonly loan or a loan that has negative amortization. You will pay higherfees and a higher interest rate in exchange for the risk the lender istaking, but they will not be out of control. The lender for a subprime loanis looking for the same thing any other program would look for – theywant to see financial security. If you need a subprime loan youobviously have a blemished credit history, but you have to show thatyou have turned your financial life around. You will have to provideexplanations for the late payments reporting on your credit report or thebankruptcy/foreclosure you endured. Once you show that you haveturned your financial life around, your credit score will not matter asmuch as it would for any other program.



Check your Credit Score and Choose theRight Mortgage Program

You have many options when it comes to obtaining a mortgage today.The common denominator among all programs is the ability to provethat you can in fact afford the mortgage and are not being put underduress to afford it. Whether you take on an FHA, VA, subprime, orconventional loan, you will have to go through plenty of evaluation toensure that it is the right decision for you right now. Sometimes asubprime loan is the better choice over an FHA loan because you will nothave to pay mortgage insurance fees upfront or on a monthly basis.Other times, the FHA loan offers the best rate and payment that makeshaving a government backed loan the better choice.



The bottom line is that you need to shop around to determinewhich loan is right for you. Don’t just assume because your creditscore is a certain number that you can only qualify for one loantype. You probably have options, and it is up to you to crunch thenumbers to decide what is right for you right now as well as in thefuture. Remember that a mortgage is a large responsibility – onethat you will likely carry with you for the next 15, 20, or 30 years.Make the right financial decision now to avoid remorse andfinancial difficulty in the future.



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Justin McHood is Americas MortgageCommentator and has been providing

Mortgage commentary for over 10 years.

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