For most people, mortgages go hand-in-hand with buying a home. In fact, according to the National Association of Realtors, 88% of homebuyers financed their home purchases last year. To take it one logical step further, credit scores go hand-in-hand with mortgages, so if you’re thinking about buying a home, you’ll also need to think about credit scores.

We researched top national credit score indicators and talked with Jessica Sanchez, Director of Underwriting and Loan Management at HomeLight Home Loans, in order to answer two important questions for homebuyers: How are credit scores determined, and what are the minimum credit scores needed to get a home loan in 2020, when so much is up in the air?

Sanchez says that over the past ten years or so — after the financial market recovered from the economic crisis of 2008 — lenders have become more comfortable with assuming risk, and therefore have been more lenient with necessary credit scores. However, the coronavirus pandemic of 2020 has created much more uncertainty in the mortgage market. In the coming days, homebuyers should be prepared to meet increased standards.

How are credit scores determined?

Your credit score demonstrates how good you are at paying bills on time and not overextending yourself financially. It’s a numerical indicator that gives lenders an idea of how likely you are to repay debt.

It’s important to realize that a credit report and a credit score are different things, but a credit score is calculated using information in your credit report. By law, you’re entitled to a free credit report every year from each credit reporting company. Most people obtain credit reports from one of three major sources: Experian, TransUnion, or Equifax.

For a fee, those companies will also provide you with a credit score. Sometimes your credit card company will share your credit score for free.

Because your credit score can affect credit card approvals, loan application approval, insurance premium rates, rental prospects, and employment applications, it’s a good idea to keep an eye on your credit report. Check yearly for discrepancies or fraud. Once you’ve obtained your credit report, you can get a basic idea of how a lender will view your credit, even if you don’t have the numerical score (see breakdowns below).

There is more than one type of credit score, and the credit score that lenders look at will probably be slightly different than the score you can receive on your own. That said, here’s a general breakdown of the math behind different major types of credit scoring.

FICO:

FICO scores range from 300 to 850. A FICO score measures several aspects of your financial health and weighs them according to the following percentages to come up with your total score.

• Payment history (35%): Do you pay bills on time? Have you ever declared bankruptcy or experienced foreclosure?
• Amounts owed (30%): How much debt do you currently have? How much of your available credit are you using?
• Length of credit history (15%): When did you open your first account and most recent account? How long has it been since you used various accounts?
• Credit mix (10%): What types of debt do you have — student loans, car loans, credit cards, retail credit, health payments?
• New credit (10%): Have you opened or attempted to open a bulk of new accounts recently?

VantageScore:

Similarly, the VantageScore ranges from 300 to 850, but this score weighs the elements of financial health a little differently.

• Payment history (40%): Once again, the most important factor is your history of paying bills on time and not defaulting on loans.
• Length and mix of credit (21%): What type of loans and credit do you have and how long have you had them?
• Credit utilization (20%): For credit cards, divide your current balance by your available credit. This is your credit utilization. Try to keep your utilization under 30%.
• Balances (11%): This will vary depending upon the time of the month and when your payments are due, but it’s still a factor.
• New credit (5%): Again, opening or attempting to open new accounts will play a role.
• Available credit (3%): How much total credit do you have available?

According to Sanchez, HomeLight Home Loans will run a tri-merge report from the three major credit bureaus and take the middle score. Whatever the particulars of your lender may be, the components of these well-respected scores give you an idea of what lenders deem important: On-time payments, debt ratios, and low credit balances.

What are the minimum credit scores needed to get a mortgage loan?

Now that we understand a little more about credit scores, let’s apply that knowledge to the larger mortgage marketplace.

Here’s the bottom line: A higher credit score will typically get you the most options and the best interest rates. But even if you don’t have great credit, there are still options for you in the home loan market.

In 2020, it may be hard to find lenders who will make a loan to those with lower credit scores. The probability of economic recession and volatility in the mortgage market have caused most lenders to impose overlays on any loans they are offering. Overlays are standards above and beyond the minimum requirements that the government or private investors have outlined. When loan environments are risky, lenders will use overlays to lower their risk levels.

What that means for borrowers in 2020 is that the minimum credit scores outlined below will almost certainly be higher for most, if not all, of these loans. It also means that if a lender imposes an overlay during the closing process, buyers might find themselves suddenly unqualified for a loan they thought they could get. It’s prudent for buyers in 2020 to shop toward the low end of their price range and bring a higher down payment than they might otherwise in order to make sure their loan closes without any snags.

Sanchez points out that loan approval is not the only thing to consider. Lenders also look at credit scores when setting your interest rate. A higher credit score demonstrates less risk for the lender, which in turn means they will offer a lower interest rate on the mortgage loan.

On the flip side, lenders will demand higher interest rates from homebuyers with lower credit to help minimize their risk.

FICO has a loan savings calculator that illustrates how improving your credit can save thousands in interest over the life of a mortgage loan.

FHA loans

FHA loans are backed by the government (Federal Housing Administration). So even though FHA loans are issued by a lender (bank or credit union), the lender is willing to take on riskier buyers than they would otherwise because the federal government is helping insure that loan.

FHA loans generally require a score of 580 to obtain a loan with a 3.5% down payment. However, if your score is lower than 580, you may still be able to qualify for a loan, as long as you can come up with a 10% down payment.

We’ve already seen FHA loan overlays as a result of the coronavirus; Some lenders might require a credit score as high as 700 for some borrowers.

VA loans

A VA (Veterans Affairs) loan is available for veterans, and is partially backed by the government. While a VA loan requires no credit score minimum, no down payment, and no PMI (Private Mortgage Insurance) to qualify, these loans are not actually made by the Department of Veterans Affairs, but instead are made by private lenders and guaranteed by the VA. Typically a lender will require a credit score of 620 or higher for a VA loan.

Like FHA loans, some lenders are imposing overlays on VA loans that bump the minimum credit score to 700.

USDA loans

USDA (United States Department of Agriculture) loans are available for homebuyers looking to purchase property in rural areas. Again, the USDA does not require a certain credit score to qualify, but most lenders who write USDA loans look for a credit score of 640 or higher. However, if your score is lower (around 580 or higher) it’s still possible to obtain a USDA loan, as some lenders will look at other financial and income variables.

The USDA loan environment is in the same boat as FHA and VA loans right now, with some lenders requiring a minimum credit score of 700 and lower debt-to-income ratios than they required before the coronavirus pandemic.

Conventional loans

Conventional mortgage loans are offered to homebuyers through lenders, banks, or credit unions and usually require a minimum credit score of 620 to 640, depending on the type and size of the loan. According to CreditKarma, the average credit score for first-time homebuyers is around 684.

Conventional lending has not escaped the same issue plaguing government-backed loans. In mid-April, JPMorgan Chase announced that it would now require a minimum 700 FICO score and a full 20% down payment to approve a mortgage loan.

Other options

If you’re in the process of establishing an acceptable credit score, some additional resources may help you in obtaining a home mortgage. There are several assistance packages available for first-time homebuyers, including discounts for first responders, help for renovations, and closing cost assistance. Also, the HUD (Department of Housing and Urban Development) has a catalog of homebuyer assistance options in your state, so be sure to check out which programs you qualify for.

That said, like many government agencies, HUD is stretched thin during the coronavirus pandemic, and it might be difficult to get the details you need. Be prepared to be persistent, and always ask what other avenues are available to you.

How will COVID-19 affect necessary credit scores in 2020?

And although the market is expected to recover from the effects of the pandemic, no one knows the exact timeline. Homebuyers may want to keep an eye on Mortgage News Daily for updates to home loan policies in these changing times.

If you do want to buy a house right now, it’s more important than ever to consider multiple loans from several lenders so that you can get the best deal that fits your needs. Also, remember that shopping at the very top of your approval range is a dangerous game when markets are shifting so quickly. If your lender imposes an overlay before you close on the house, you might not be able to get another loan, and you could miss out on your dream home — so keep that in mind when you’re making an offer.

No matter where your credit is in 2020, becoming a homeowner may not be beyond reach. Discuss your personal credit and subsequent home buying options with your real estate agent, who may then connect you with a reputable loan officer, mortgage broker, or financial advisor. Every credit situation is different, and these qualified experts can help you optimize your credit and leverage it into the best home buying situation possible in 2020.