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Credit Score Requirements for
Home Loan Programs
The largest concern most people have when looking to purchase a home
is what program they will qualify for given their credit score. It is no
secret that credit has been given a very important role in the application
of any financial product, but when it comes to the mortgage, it is
essential. Not every program has a cut and dry minimum credit score,
but the guidelines are easy enough to understand to help you figure out
just where you are going to end up in your quest to become a
homeowner. As you navigate the world of mortgages, you will see that
there are many different types of programs to choose from aside from
the varying interest rates and fees that pop up. Among the most
common mortgage programs are conventional loans, subprime loans,
FHA, and VA loans.

Credit Score Guidelines for
Conventional Residential Mortgages
The most popular and typically most sought after loan is the conventional
loan and with good reason. This loan offers you the ability to have access
to the lowest rates and fees as well as the best terms. Conventional loans,
however, are reserved for those with the best credit score and credit
history. It is also reserved for those that are going to put money down on
the home as the highest program conventional loans offer is the
Conventional 97, which as the name suggests, requires a 3% down
payment. Because these programs offer the lowest rates and most
reasonable fees, they also have the highest credit score minimums in
order to qualify for the program.

In general to qualify for a conforming loan, your credit should fall into
one of the following categories:
Greater than 75% LTV and No Monthly 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
Greater than 75% LTV and 6 Months of Reserves
660

Greater than 75% LTV and 2 Months of Reserves
Less than 75% LTV and 2 Months of Reserves
These figures are all based on a primary residence. If you are purchasing
a second home, such as a vacation home or an investment home that you
are going to rent out or sell after fixing it up, the credit score minimums
differ slightly, although the remaining stipulations remain the same.

Conventional Mortgage Qualifications
for Second Homes
Greater than 75% LTV with 2 Months of Reserves
With a debt ratio less than 36%, the minimum credit score is 680

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
680

640

As you can see, the credit score incrementally decreases as the
compensating factors for the loan increase. The more reserves
you have on hand, the lower the credit score requirements
become. The same is true for the debt ratio – the lower the debt
ratio, the lower the required credit score to qualify for a
conventional mortgage.

FHA Mortgage Credit Score Requirements
FHA mortgages used to be known as the first-time homebuyers
mortgage, 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 the
requirements, which are easier to qualify for than a conventional
mortgage, you can be a good candidate for this loan program which is
backed by the FHA. The thing to know about FHA mortgages is that it is
not funded by the FHA, which means that the qualifications for each
mortgage are generally set by the FHA as they will not back an
unqualified loan, but the main requirements are set by the bank itself as
they are the ones funding the loan and/or selling it on the secondary
market.

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

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

VA Mortgage Credit Score Requirements
VA mortgages are reserved for those that have served our country. The
VA has specifications regarding the length of time you must serve in
order to qualify, which you can find here. If you meet the requirements
and are able to get your Certificate of Eligibility (COE), you then have to
qualify for the loan with your financial credentials, which is very easy
to do because the requirements are much more relaxed than
conventional loans. VA loans, like FHA loans, are not funded by the
government, but are rather backed by it. This means that they
guarantee a portion of your loan should you default on it. This makes it
easier for banks to provide funding to our veterans, even if they do not
have very high qualifications for a loan.

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

Subprime Loans for Bad Credit Borrowers
Subprime loans used to have a bad rap – they were the loans that
irresponsible people got when they were shopping for a home. They
were also the loans that let people get away with no documentation
and stated income. Today, subprime loans have a completely different
reputation. They are harder to obtain and do not charge obnoxious
fees or rates because they are regulated by the Ability to Repay Rule
that governs every mortgage that is given to a borrower.

Today, subprime loans are affordable and do not provide you with terms
that could harm you in the future. You will not be stuck with an interest
only loan or a loan that has negative amortization. You will pay higher
fees and a higher interest rate in exchange for the risk the lender is
taking, but they will not be out of control. The lender for a subprime loan
is looking for the same thing any other program would look for – they
want to see financial security. If you need a subprime loan you
obviously have a blemished credit history, but you have to show that
you have turned your financial life around. You will have to provide
explanations for the late payments reporting on your credit report or the
bankruptcy/foreclosure you endured. Once you show that you have
turned your financial life around, your credit score will not matter as
much as it would for any other program.

Check your Credit Score and Choose the
Right Mortgage Program
You have many options when it comes to obtaining a mortgage today.
The common denominator among all programs is the ability to prove
that you can in fact afford the mortgage and are not being put under
duress to afford it. Whether you take on an FHA, VA, subprime, or
conventional loan, you will have to go through plenty of evaluation to
ensure that it is the right decision for you right now. Sometimes a
subprime loan is the better choice over an FHA loan because you will not
have to pay mortgage insurance fees upfront or on a monthly basis.
Other times, the FHA loan offers the best rate and payment that makes
having a government backed loan the better choice.

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

T O L E A R N M O R E
C L IC K HE R E

Justin McHood is Americas Mortgage
Commentator and has been providing
Mortgage commentary for over 10 years.
Mortgage Commentator
INFORMATION PROVIDED BY:
Justin McHood

LEARN MORE ABOUT MORTGAGE COMMENTATOR:
MORTGAGECOMMENTATOR.COM
@MORTGAGECOM_
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Minimum Credit Scores- MINIMUMCREDITSCORES.COM

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