Is Your Mortgage Score High Enough to Qualify for a Home Loan?
Understand how your mortgage score influences loan eligibility, interest rates, and terms, plus steps to improve your credit for a smoother homebuying process.
Getting approved for a mortgage depends heavily on your credit score, which lenders use to assess your likelihood of repaying the loan. A higher score improves approval chances and leads to better loan terms, while a lower score can mean higher costs or rejection.
Understanding what affects your score and how to improve it can make a significant difference when applying for a home loan.
Lender Score Requirements
Mortgage lenders set minimum credit score requirements based on loan type. Conventional loans, which are not government-backed, typically require at least a 620 score. However, meeting this minimum doesn’t guarantee approval, as lenders also evaluate income, debt, and financial history.
Government-backed loans allow for lower scores. FHA loans accept scores as low as 500 with a 10% down payment, while a 580 score qualifies for a 3.5% down payment. VA loans, available to eligible military service members and veterans, have no government-mandated minimum, though many lenders require at least 620. USDA loans, designed for rural homebuyers, generally require a 640 score for automated approval, though lower scores may still qualify with additional documentation.
Higher scores improve approval odds and access to better loan terms. Borrowers with scores above 740 typically receive the lowest interest rates. Some lenders use tiered pricing, where even small score increases can lead to better offers.
Loan Terms and Interest Impact
Your credit score affects more than just approval—it directly influences interest rates and overall loan cost. Lenders use risk-based pricing, offering lower rates to borrowers with higher scores because they are seen as less likely to default. Even a small rate difference can significantly impact long-term costs.
For example, a borrower with a 760 score might secure a 30-year fixed mortgage at 6.5%, while someone with a 620 score could face a 7.5% rate or higher. On a $300,000 loan, that 1% difference adds about $200 to the monthly payment, totaling over $70,000 in extra costs over the loan’s lifetime.
Credit scores also affect down payment requirements and private mortgage insurance (PMI) costs. Borrowers with lower scores may need to put down more money to offset lender risk. PMI, required for conventional loans with less than 20% down, is priced based on credit scores. A borrower with a 620 score could pay significantly more in PMI premiums than someone with a 740 score.
Nontraditional Credit Factors
For applicants with limited credit history, lenders may consider alternative data. Rental payment records can help demonstrate financial responsibility. While rent payments don’t always appear on credit reports, some lenders consider them if consistently paid on time. Services like Experian Boost and Fannie Mae’s rent payment evaluation can integrate this data into mortgage applications.
Utility and phone bill payments can also provide insight into financial reliability. While these payments typically don’t appear on credit reports, some lenders review them manually. Newer credit-scoring models, such as FICO 10T and VantageScore 4.0, are beginning to incorporate them more systematically.
Bank account activity is another factor. Lenders may review checking and savings account statements to assess cash flow patterns and whether a borrower maintains a stable balance. A well-managed account with steady income and responsible spending can help offset a lack of traditional credit history. Some mortgage programs, particularly those for first-time homebuyers, actively consider these factors.
How Payment History Affects Your Score
Payment history is the most important factor in credit scoring, accounting for 35% of a FICO score. Lenders view missed or late payments as signs of increased default risk. A single late mortgage payment—typically reported if more than 30 days overdue—can lower a score by 60 to 110 points, with greater consequences for those who previously had high scores. The impact worsens if the delinquency extends to 60 or 90 days.
Missed payments on other financial obligations, such as auto loans and credit cards, also affect creditworthiness. Accounts that go to collections or are charged off indicate severe financial distress, making mortgage approval more difficult. Bankruptcy filings, which remain on a credit report for up to 10 years, can significantly impact loan eligibility and interest rates.
Correcting Errors on Your Credit Report
Errors on a credit report can lower a score and affect mortgage eligibility. Common mistakes include incorrect account statuses, duplicate debts, or fraudulent activity. Since mortgage approvals rely on data from Equifax, Experian, and TransUnion, reviewing reports from all three bureaus ensures accuracy.
To dispute inaccuracies, submit a formal request to the credit bureau reporting the error. This can be done online, by mail, or over the phone, with supporting documents such as bank statements or payment confirmations. Under the Fair Credit Reporting Act (FCRA), credit bureaus must investigate disputes within 30 days and correct verified errors. If a lender reported incorrect information, contacting them directly may speed up the process. Keeping records of all communications helps ensure disputes are resolved effectively.