You don’t need flawless credit to get a mortgage. In some cases, scores can be in the 500s. But because credit scores estimate the risk that you won’t repay the loan, potential lenders will reward a higher score with more choices and lower interest rates.
Here are the minimums for certain types of loans and advice on restoring your credit to make buying less costly.
Government-backed loans accept lower scores
The most widely available government-backed loans are through the Federal Housing Administration. FHA loans have a minimum FICO score of 580 with a down payment of 3.5%. Scores can go as low as 500 with a 10% down payment.
In May 2017, just under 5% of FHA loans went to people with scores below 600, according to Ellie Mae, a mortgage processing company. The report said the average score for FHA purchases was 683, and the average for FHA refinances was 650.
Conventional loans typically require higher scores
Conventional loans — which aren’t insured by a government agency like the FHA, the Department of Veterans Affairs or the Agriculture Department — tend to require higher scores. FICO scores for home buyers using conventional loans averaged 753, according to the Ellie Mae report. Refinances averaged 728.
David Konzen, a real estate agent in Marietta, Georgia, said he views scores of less than 580 as a definite signal to rebuild credit. Generally, real estate agents will send clients to lenders to see if they can prequalify for a loan. Those who don’t like the terms they’re seeing can then try to qualify for an FHA loan or work to shore up their credit.
A warning: Would-be buyers having trouble qualifying for a loan may be tempted by “seller financing” offers, where the buyer pays the current homeowner over time. Consumer advocates say many such deals qualify as “toxic transactions.”
Build your credit to cut your costs
Mortgage loan originator Chris Hauber of Denver said he suggests would-be buyers wait until they have scores of at least 620. Higher is better, he says, and those with scores of 740 or more will get the lowest interest rates.
Using a mortgage calculator can make clear how lower rates make a big difference: At 4%, the principal and interest on a $200,000 30-year mortgage would be $955 a month — but at 6% it’s $1,199. Other implications:
- With interest eating up more of your payment, you’ll need to either qualify for higher payments or choose a less expensive home.
- You may pay more for private mortgage insurance, which is required if you put less than 20% down.
- Lenders may require you to have a larger down payment or more cash reserves before they approve you.
How to build credit
If your score won’t get you the best deals, it may make financial sense to keep renting for a while and use the time to polish your credit profile.
- Pay all bills on time: Payment history has the most powerful influence on your score.
- Keep balances low: Experts recommend you use no more than 30% of the limit on any credit card, and much lower is much better.
- Check your credit reports: Look for score-lowering errors. If you find something, dispute it.
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Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @BeverlyOShea.