Fannie Mae removes minimum credit score for mortgages

Historically, the minimum credit score to qualify for conforming conventional mortgages has been 620. Recently, Fannie Mae has followed Freddie Mac in removing minimum credit scores, instead relying on a more holistic approach to mortgage approval, where credit remains an important factor.

What this means for borrowers

Neither of the major providers of conforming conventional loans has a minimum credit score. Instead, both Fannie Mae and Freddie Mac are relying on an analysis of several risk factors. Credit history is still taken into account, along with factors such as the amount of reserves you have and the size of your down payment or existing equity.

The change aligns with other mortgage investors, such as USDA and VA, which have no minimum credit score requirement.¹ FHA has a minimum score of 580, or 500 with 10% down.² Lenders may still set their own minimum qualification standard for any loan option. Rocket Mortgage requires a score of 580 with 3.5% down for FHA loans.³

Along with this change, both Fannie Mae and Freddie Mac recently started supporting VantageScore^® 4.0, in addition to Classic FICO^® models. Although these models are similar, the particulars may change qualification in some instances.

Qualification factors for conforming conventional loans

While there's no longer a minimum credit score associated with conforming loans, credit still has a major role. The bigger change is that other factors are considered, so that credit score alone isn't disqualifying. Fannie Mae has a list of risk factors considered by its automated underwriting system, Desktop Underwriter^®.

• Credit history: Credit history is how well you've handled installment and revolving credit in the past. The longer you've maintained good habits, the better.
• Delinquent accounts: This is looking at anywhere you may be behind on payments, have charge-offs, or accounts in collections.
• Installment loans: These balances are paid off over time. Think home, auto, personal, and student loans.
• Revolving credit utilization: This includes balances that fluctuate every month, like credit cards and home equity lines of credit. It's generally recommended that you use no more than 30% of your credit limit.
• Public records: These will show things like outstanding liens, judgments, foreclosures, and bankruptcies that may be on your record.
• Equity or down payment: The larger your down payment or existing equity position in your home, the less risk there is for lenders.
• Rent payment history: If you're buying a home, past rental history can show that you've been able to adequately manage and prioritize housing expenses.
• Reserves: This refers to the number of months' savings you have to make your mortgage payment in the event of a loss of income. More savings means less risk.
• Loan purpose: Purchase transactions are considered less risky by Fannie Mae than refinances .⁴ When evaluating refinances, cash-out refinances are viewed more skeptically because you're taking on a bigger balance.
• Loan term: Shorter-term loans are looked upon more favorably than those that pay off over a longer time frame.
• Amortization type: Amortization refers to how a loan is paid off over time. Fixed-rate loans are viewed as more certain than adjustable-rate mortgages.
• Occupancy: In times of financial distress, people are more likely to make payments on their primary mortgage than on second homes or investment properties.
• Housing expense ratio: This looks at the percentage of your gross monthly income that goes toward your mortgage payment. The lower this ratio is, the better you're expected to be able to handle the payments.
• Debt-to-income ratio (DTI): This looks at all of your minimum monthly debt payments, including home loans, compared to your pretax monthly income. Housing expense ratio is sometimes referred to as front-end ratio, while DTI is a back-end ratio.
• Property type: This looks at the number of units and the form of the home. For example, single-unit homes are considered less risky than multiunit ones, and stick-built homes are considered more sure than manufactured homes.
• First-time home buyer: Being a first-time home buyer can be a mitigating factor if you have a shorter credit history.
• Cash flow: Cash flow is sometimes looked at to make sure you have enough money coming in on a regular basis to afford your payments. This is verified through bank and other account statements.

The bottom line: Fannie Mae is getting the whole picture

Following Freddie Mac, Fannie Mae is eliminating minimum credit scores in favor of a more comprehensive view of a client's qualifications, which still includes credit. Lenders can still set their own credit score thresholds, but other factors, such as rent history and cash flow, are now also taken into account.

Ready to look into your home loan options? You can fill out an application online.

¹ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² Rocket Mortgage is not acting on behalf of FHA or HUD

³ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

⁴ Refinancing may increase finance charges over the life of the loan.