Minimum Credit Score for a Home Loan

Required Minimum Credit Score to Secure a Home Loan

There is no simple answer to what kind of credit score you need to secure a home mortgage. Obviously the higher a credit score the better chance but it also depends largely on the kind of home mortgage you are a seeking. While there are still programs available for people with scores below 580, they are becoming rarer and rarer. The minimum credit score you will need for a home mortgage from Freddie Mac and Fannie Mae is 620.

Remember though, your credit score is only one part of the equation. Every home mortgage lender wants to see three things from any potential customer:

Having these three things in addition to a higher credit score will certainly bolster your chances of getting a home mortgage. Still, if you are like 30% of Americans with bad credit and you need to get a home mortgage, you should read our section on How to Secure a Loan with Bad Credit.

Types of Home Loans
A home loan or mortgage is negotiated between the borrower or mortgagor and the lender or mortgagee; it involves transferring the interest in a piece of land and/or structure as a means to securing financing. Several types of mortgage are available.
Fixed Rate Mortgage (FRM)

Fixed rate home mortgages are loans wherein the interest rate is locked in over the life of the loan. A thirty-year home loan will have a fixed rate for thirty years after which, if all payments are made on time, your home is paid for. The biggest benefit to the mortgagor is that their interest rate can never increase and their payment is the same for thirty years. Unless the home mortgage is fixed to a higher interest rate, the mortgagee generally misses the opportunity to make more off the loan when interest rates increase. FRMs usually have higher interest rates than other types of mortgages. Still, if rates fall even further, homeowners can refinance at a lower interest rate.

Adjustable Rate Mortgage (ARM)

With an adjustable rate home mortgage, your home loan has a fixed interest rate and consequently fixed monthly payment for a certain period of time. After the initial fixed period (anywhere from six months to six years) the interest rate and by extension monthly payments fluctuate to reflect current market interest rates. Certain ARMs may adjust every few months while others will only do so once a year. Many ARMs do limit the amount interest rates can change. Unlike fixed rate home mortgages, ARMs place the risk with the owner who assumes the risk of rising interest rates.

Owner Financing

This is usually a last resort for those who cannot qualify for other types of home mortgages. Owner financing or owner carryback means the owner finances or carries some part of or the entire mortgage. Owner financed home mortgages are usually interest only and typically involve a balloon payment, which means that at the end of the loan’s term, the owner must either pay it off in cash, refinance, or sell the home.

Home Equity Loan

A home equity loan or home equity line of credit (HELOC) is a home mortgage where the owner uses the equity in his or her home as collateral. HELOCs are usually used for large expenses or major items such as education, medical costs, home improvements, instead of everyday expenses. You may need to get your home appraised and may have to pay various fees. Most HELOCs’ funds can be tapped during a 5 to 25 year draw period but must be paid back by the end of that term either according to a loan amortization schedule or as a balloon payment. It is important to remember that many HELOCs carry a variable rate so your monthly payment may not remain constant.

Second Mortgage

Second mortgages provide the borrower money repayable over a fixed term. The repayment schedule usually calls for equal payments over the home mortgage’s term. A second mortgage is different from a HELOC in that it is more like a traditional loan and not a line of credit and it takes interest rates, fee, points, and other finance charge in account. A second mortgage’s interest rate is based solely on the periodic rate.

Reverse Mortgage

Reverse mortgages are similar to traditional home mortgages only they work in reverse. Homeowners convert their home’s equity into cash. Reverse mortgages allow retired homeowner who’ve paid off their loans to borrow money against the value of their home. The borrower receives payments or a lump sum of cash from the lender and repayment isn’t due until the home is no longer the primary residence, it is sold, or the homeowner dies.

Alternative Financing »