Your credit score could fall anywhere between 350 and 800. It’s safe to say, though, if you fall on the lower end, you’ll have a hard time finding a mortgage from any lender. That doesn’t mean you won’t find a loan, but finding a conventional loan would be next to impossible.
According to Ellie Mae, the average borrower has a 752 credit score when buying a home with Fannie Mae financing. The average borrower refinancing a conventional loan has a 728 credit score. These are both a far cry from the minimum 350 credit score.
To put this in perspective, let’s look at the average FHA credit score for both a purchase and refinance. The average FHA borrower buying a home has a 686 credit score and the average borrower refinancing an FHA long has a 649 credit score.
What Happens if You Have a Low Credit Score?
If you don’t have the average 752 credit score, it doesn’t mean you won’t get a conventional loan. It may mean, however, that you’ll have a higher interest rate and most likely have higher fees.
Keep in mind, though, lenders don’t adjust your interest rate and fees just based on your credit score. They also look at your loan-to-value ratio. This directly relates to how much money you put down on the home. The more money you invest in the home, the lower your risk. Lenders like borrowers to have their own money invested because it makes the likelihood of on-time payments more likely.
In general, lenders will not entertain a borrower with a credit score lower than 620 for a conventional loan. If they do, the interest rate and/or fees are usually too high for the average borrower to afford.
Other Conventional Loan Requirements
Aside from the credit score, conventional lenders will look at the following factors to determine if you are eligible for the Fannie Mae Program. These factors include:
- At least 2 years of solid employment history – You can change jobs during that time, but staying within the same industry will help you secure the best rates and fees.
- Proof of income – You must be able to provide solid proof of your income with traditional methods including paystubs, W-2s, and tax returns. If you cannot verify your income the traditional way, a conventional loan won’t be an option.
- Minimum 5% down – You can borrow up to 95% of the home’s value, but as we discussed above, the more money you put down, the more likely it is that you’ll get approved, especially if you have a lower credit score.
- Reserves – If you have money left over after paying the down payment and closing costs, lenders can use this for qualifying factors. The more money you have set aside, the more money you have to make your mortgage payments even if your income stopped.
Lenders Have the Final Say
Of course, the lender has the final say in which borrowers get approved and which do not. As long as lenders follow the minimum guidelines set by Fannie Mae and/or Freddie Mac, they can add their own requirements. In other words, they can make the requirements stricter, making it harder for borrowers to get a loan.
Luckily, you can shop around with different lenders to find the loan that works for you. Not every lender makes the restrictions harder. They follow Fannie Mae’s guidelines. If you meet them, you can secure financing.
If you want to increase your chances of conventional loan approval, start working on your credit score as early as possible. Make sure your payments are made on time and that your credit accounts are not overextended. You should also check your credit report for any errors that require fixing in order to increase your credit score. With the proper due diligence and time, you can get your score where it needs to be to qualify for conventional financing.