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What Kind of Home Loan Can I Get With a 650 Credit Score?

Through April 20, 2022, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

A credit score of 650 leaves considerable room for improvement—it's regarded as a "fair" score by credit scoring model FICO®. A FICO® Score of 650 meets some lenders' minimum requirements for a mortgage loan—but credit scores aren't all mortgage lenders look for when deciding how much to lend you or what interest rates they'll charge.

Is 650 a Good Credit Score?

On the FICO® Score scale range of 300 to 850, higher scores indicate greater creditworthiness, or stronger likelihood of repaying a loan. A FICO score of 650 is considered fair—better than poor, but less than good. It falls below the national average FICO® Score of 710, and solidly within the fair score range of 580 to 669. (A score of 650 using the VantageScore scoring system also falls within its fair range of 601 to 660; FICO® Scores are more widely used in the mortgage industry, so we're focusing on a 650 FICO® Score.)

Average Mortgage Interest Rate With a 650 Credit Score

Mortgage lenders, like other creditors, typically assign interest rates based on how risky they believe it will be to give you a loan. Borrowers seen as greater credit risks—those deemed less likely to repay their loans—are charged higher rates than lower-risk borrowers.

A 650 credit score, like any other FICO® Score in the fair range, will likely exclude you from getting a mortgage lender's best-available interest rate. Some lenders may consider a 650 FICO® Score grounds for denying a mortgage application altogether, but a 650 score meets many lenders' minimum lending requirements. It's also sufficient to qualify for U.S. government-backed mortgages issued through the Federal Housing Administration (FHA), Department of Veteran's Affairs (VA), and the U.S. Department of Agriculture (USDA).

According to FICO®'s Loan Savings Calculator, the national average interest rate on a 30-year fixed $250,000 mortgage for applicants with FICO® Scores ranging from 640 to 659 is 3.598%. For comparison, a marginally better FICO® Score of 660 to 679 loan qualifies for a lower rate of 3.168%, which translates to a savings of more than $12,000 over the life of the loan. (An applicant with an exceptional FICO® Score in the 760 to 850 range, by contrast, would qualify for a 2.555% rate, and a savings of more than $50,000 over the life of the loan.)

Borrowers with FICO® Scores of 650 are likely to be offered adjustable-rate mortgage (ARM) loans, with introductory interest rates that apply for a set number of years—typically one, but sometimes three, five, seven or even 10—and then change annually. ARMs can be tricky to manage, since their rates and monthly payment amounts can increase significantly each year after the introductory period ends.

Because lenders determine their lending policies independently, it may be possible to find a lender that will issue you a fixed-rate mortgage with a constant rate over the life of the loan. If your FICO® Score is 650, that interest rate is likely to be relatively steep, but the payments will be more predictable than with an ARM loan.

What Additional Factors Affect Your Mortgage Rates?

Credit scoring systems, which use information in your credit report to evaluate your likelihood of failing to repay a loan, play an important role in many lenders' evaluation of borrower risk. But they are just one tool lenders use when determining what interest rate to charge you.

Other factors that influence the interest rates lenders charge include:

  • Debt-to-income ratio: Mortgage lenders typically require proof of income in the form of pay stubs or tax returns, and they also pay close attention to your outstanding debts and the amount you pay creditors each month. Debt-to-income (DTI) ratio, the percentage of your monthly pretax income that goes toward debt payments, is an important gauge of your ability to cover new debts. As your DTI ratio increases, so does your perceived risk; higher DTI ratios may therefore bring higher interest charges.
  • Down payment: Conventional mortgage lenders prefer a down payment of 20% of the home's purchase price, but many lenders allow you to make a lower down payment. They typically charge higher interest rates as a tradeoff, and also require you to purchase private mortgage insurance (PMI) to protect them against financial loss in case you fail to repay the loan. Conversely, if you can put down more than 20% of the purchase price up front, you may be able to negotiate a lower interest rate.
  • Loan term: In general, you can get a lower interest rate if you seek (and qualify for) a loan with a shorter repayment term—a 15-year mortgage instead of a 30-year one, for instance. For any given loan amount, a shorter-term loan will bring higher monthly payments but lower total interest costs.

Be Prepared and Know Your Credit Before You Apply

Credit scores are a distillation of the information in your credit reports, which document your history of borrowing money, using credit and making debt payments. When considering mortgage applications, lenders typically use credit scores for a "first pass" evaluation of creditworthiness, then look behind the scores by taking a careful look at your credit reports and other financial information.

For that reason, before applying for a mortgage, it's smart to take a careful look at your own credit reports from all three national credit bureaus (Experian, TransUnion and Equifax). Doing so can help you spot and correct inaccurate entries that make a poor impression (and lower your credit scores), and can also help you anticipate and prepare for questions lenders may have about your credit history. You can get a free credit report from Experian, TransUnion and Equifax at AnnualCreditReport.com.

Credit report entries that might spark lender concern include:

  • Late or missed payments: The negative effects of late payments on your credit score diminish over time, so a late payment made several years ago might not have a big impact on your score, but it could give a lender pause. You can probably explain away an isolated incident as an honest mistake, but if your history includes multiple missed payments, you may need to offer a more detailed account—and an explanation of how you'll avoid repeating those missteps in the future.
  • Charge-offs or accounts in collection: If a lender is unable to collect a debt from you, they may close your account (a process known as a charge-off) or sell the debt to a collection agency, which assumes the legal right to pursue you for the unpaid funds. Charge-offs and collection entries stay on your credit reports for seven years. Even if you eventually pay the collection agency (or the original creditor), the presence of these entries on your credit reports could deter a mortgage lender.
  • Major derogatory entries: If your credit report contains a mortgage foreclosure, vehicle repossession or bankruptcy, lenders are likely to see red flags. All are evidence of debt that was not repaid according to original lending agreements—circumstances that understandably make lenders wary. These entries can stay on your credit reports for seven to 10 years, with older entries seen as less worrisome—and therefore less damaging to your credit scores—than more recent ones. Still, if you have any of these entries on your credit report, some mortgage lenders may turn down your loan application altogether. Lenders willing to consider your application will expect you to explain the negative entries, and show evidence that you can avoid similar issues moving forward.

If you review your credit reports and find any inaccurate entries, you can and should address them immediately by filing a credit report dispute. Depending on the nature of the issue, you may need to provide the credit bureau with backup documents, such as a receipt or statement documenting a payment mislabeled as late. Disputes can take a few weeks to process, and lenders are often reluctant to consider loan applications while disputes are pending. If your credit reports require correction, it's wise to avoid submitting a mortgage application (or seeking any other kind of credit) until your dispute is resolved.

How to Improve Your Credit Score Before Applying for a Mortgage

While a FICO® Score of 650 may be sufficient to get you a mortgage, you may be able to improve your credit profile as preparation for a mortgage application within as little as six months to a year. Taking steps to increase your credit scores could help you qualify for lower interest rates, saving you many thousands of dollars over the life of a mortgage loan.

Measures to consider for improving your credit score include:

  • Pay down your debts. Reducing the amount you owe can improve your DTI ratio and make your application more attractive to lenders. If you have significant credit card debt, pay down your outstanding balances.
  • Lower your credit card usage. Any reduction in credit card debt can help improve your credit standing, but you'll reap the greatest benefits by paying down cards with high utilization rates—that is, with balances that constitute a high percentage of their borrowing limits. Lower utilization is better, and experts recommend keeping utilization for each card below 30% to avoid reducing your credit scores.
  • Avoid new debt. Credit checks associated with new credit applications can cause temporary reductions in your credit scores. These typically rebound within a few months as long as you keep up with your bills, but to keep your scores as high as possible when applying for a mortgage, it's wise to avoid applying for other loans or credit cards in the months before you seek a home loan.
  • Pay your bills on time. Late payments on loans or credit card accounts have a major negative impact on credit scores, and mortgage lenders see them as a bad sign. The single best habit you can adopt to encourage credit score improvement is to pay your bills on time every month, without fail.

A 650 credit score can be a solid platform for getting the house you need. It can help you qualify for a mortgage, but it'll likely be one that carries a fairly steep interest rate. It's also a score you can build on to help you get a more affordable loan, today or in the future, when you refinance or buy a new home.