How Your Credit Score Impacts Mortgage Approval

A 40-point difference in your credit score could cost you nearly $200,000 over the life of your mortgage. That is not a typo. According to recent FICO data, borrowers with scores above 760 pay roughly $536 less per month compared to those in the 620 to 639 range on a $400,000 loan. In a market where mortgage rejection rates hit a decade high of 22.6% in 2024, understanding your credit score has never been more critical.

The median credit score for new mortgage borrowers reached 772 in Q1 2025, according to the Federal Reserve Bank of New York. If your score falls below that benchmark, you are not alone, but you may face higher rates and tougher approval standards. This guide breaks down exactly how your credit score affects mortgage approval and what you can do about it.

What Credit Score Do You Need for a Mortgage?

Different loan programs have varying minimum credit score requirements. Conventional loans backed by Fannie Mae and Freddie Mac typically require a minimum score of 620, though lenders may set their own higher thresholds.

FHA loans offer more flexibility for borrowers with lower credit scores. You can qualify with a score as low as 580 with a 3.5% down payment, or 500 if you put down at least 10%.

VA loans backed by the Department of Veterans Affairs do not have an official minimum credit score requirement. However, most VA lenders prefer scores of 620 or higher, with some accepting scores as low as 580 with compensating factors like stable employment or cash reserves.

The Real Cost of a Lower Credit Score

Your credit score directly determines the interest rate lenders offer you. Even small rate differences compound dramatically over a 30-year mortgage term.

As of late 2025, borrowers with credit scores of 760 or higher qualify for rates around 6.5% on a 30-year fixed mortgage. Those with scores between 620 and 639 face rates near 8% or higher, adding hundreds of dollars to monthly payments.

On a $400,000 loan, this difference amounts to approximately $165 per month and nearly $60,000 in additional interest over the loan term. Bump that comparison to scores above 760 versus below 640, and the gap widens to almost $200,000 in total interest paid.

Why Lenders Care So Much About Credit Scores

Credit scores serve as a quick snapshot of your financial reliability. The FICO model, used in roughly 90% of U.S. lending decisions, ranges from 300 to 850.

Lenders view higher scores as indicators that you pay bills on time and manage debt responsibly. Lower scores suggest greater risk that you might miss payments or default on the loan entirely.

According to 2024 HMDA data, credit history was cited as the primary reason for denial in nearly 25% of all rejected mortgage applications. This makes your credit profile one of the most scrutinized elements of any home loan application.

Understanding Credit Score Ranges

The average U.S. credit score reached 715 in 2024 according to Experian data. Knowing where you fall within the scoring spectrum helps set realistic expectations for your mortgage journey.

Scores between 300 and 579 are considered poor and will significantly limit your options. You may still qualify for FHA loans with a larger down payment, but expect substantially higher interest rates.

Scores from 580 to 669 fall into the fair category, opening doors to FHA and some conventional programs. Good credit ranges from 670 to 739, providing access to competitive rates on most loan types.

Scores of 740 and above are considered excellent or “top tier” by most lenders. This range typically qualifies you for the best available rates and terms in the market.

Five Factors That Determine Your Score

Payment history carries the most weight in credit scoring, accounting for approximately 35% of your FICO score. Even one late payment can cause significant damage and remain on your report for seven years.

Credit utilization makes up about 30% of your score. This ratio measures how much of your available credit you are currently using. Keeping balances below 30% of your credit limits signals responsible management to lenders.

Length of credit history contributes roughly 15% to your overall score. Lenders prefer to see established accounts with long track records of on-time payments.

Credit mix accounts for 10% and reflects your experience managing different types of credit. The remaining 10% comes from new credit inquiries, which can temporarily lower your score when you apply for new accounts.

How to Improve Your Score Before Applying

Taking six months to a year to strengthen your credit before applying can save you tens of thousands of dollars. Start by obtaining free copies of your credit reports from all three major bureaus.

Review each report carefully for errors or inaccuracies. The Consumer Financial Protection Bureau notes that disputing incorrect negative information can lead to quick score improvements once corrected.

Pay down credit card balances aggressively, focusing on getting utilization below 30%. This single action can boost your score within one to two billing cycles as creditors report updated balances.

Avoid opening new credit accounts or making large purchases on credit in the months before applying. Each new application creates a hard inquiry that temporarily impacts your score.

Beyond Credit Score: Other Approval Factors

While your credit score matters tremendously, lenders evaluate several additional factors. Your debt-to-income ratio, which compares monthly debt payments to gross income, was the leading cause of mortgage denials in 2024, accounting for 34% of rejections.

Most conventional lenders prefer a debt-to-income ratio below 36%. FHA loans allow ratios up to 43% or higher with compensating factors like substantial savings or minimal other debts.

Employment stability also plays a significant role in approval decisions. Lenders typically want to see at least two years of consistent work history in the same field or position.

Planning Your Home Purchase

Before starting your home search, use a mortgage rate calculator to estimate monthly payments at different loan amounts and interest rates. This exercise helps establish a realistic budget based on your current credit profile.

Getting preapproved provides a clear picture of your borrowing capacity and strengthens your position with sellers. The preapproval process involves a thorough review of your credit, income, assets, and employment history.

Shop multiple lenders to ensure competitive terms. Freddie Mac research shows that comparing offers from different lenders can save homebuyers $600 to $1,200 annually in a high-rate environment.

When Waiting Makes Financial Sense

Sometimes delaying your mortgage application yields better long-term results. If your credit score falls below 620, spending several months building your score could dramatically reduce your total borrowing costs.

Major credit events like bankruptcy or foreclosure require mandatory waiting periods. FHA loans typically require two years after bankruptcy, while conventional loans may require four years following a foreclosure.

Use any waiting period to save for a larger down payment and pay down existing debts. These improvements strengthen your overall application and may qualify you for better rates when ready.

Taking Control of Your Mortgage Future

Your credit score represents one of the most powerful factors in determining your mortgage costs. The difference between good and excellent credit can mean tens of thousands of dollars saved over the life of your loan.

Check your scores today and review your credit reports for accuracy. Address any issues you discover and commit to habits that build credit over time, like paying all bills on time and keeping credit utilization low.

With preparation and patience, you can position yourself as a strong mortgage candidate. The effort you invest now in improving your credit pays dividends throughout your entire homeownership journey.