Is My Credit Score Good Enough for a Mortgage?

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Is My Credit Score Good Enough for a Mortgage?

Your credit score, which lenders use to assess the risk of providing credit or lending money to you, is an important component in deciding whether you will be accepted for a mortgage. The score is not a constant figure; it varies on a regular basis in reaction to changes in your credit activity (for example, if you open a new credit card account).1 What number suffices, and how do credit ratings affect the interest rate you are offered? Continue reading to discover out.

Key Takeaways

  • In general, a credit score of 670 or above will provide prospective mortgage applicants with prime or favorable interest rates on their loan. 2
  • Scores below 620 are termed subprime, and come with higher interest rates and additional limitations as a result of the lender’s increased risk. 2
  • A minimum FICO credit score of 580 is required to qualify for a low down payment FHA-backed loan. 3
  • Those with poor credit may still receive a mortgage from specialist lenders, but they will pay higher interest rates, demand bigger downpayments, may require a guarantor or co-borrower, and will be subject to income verification. 3

How Are FICO Scores Determined?

The FICO score, developed by Fair Isaac Corporation, is the most widely used credit score. 4 It is computed using the following information from your credit report:

  • Your payment history (which accounts for 35% of your score)
  • Amounts you owe (30%)
  • Your credit history’s length (15%)
  • Types of credit you use (10%)
  • New credit (10%)1

What Is the Minimum Credit Score to Qualify for a Mortgage?

There is no “official” minimum credit score since lenders may (and do) examine other variables when assessing whether you qualify for a mortgage. You may get a mortgage with a lower credit score if you have a substantial down payment if your debt burden is relatively modest. Because many lenders consider your credit score to be just one element of the jigsaw, a low score will not always exclude you from obtaining a mortgage. 3

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What Lenders Like to See

Because lenders have access to a variety of credit scores (each based on a different scoring methodology), be sure you understand which score your lender is using so you can compare apples to apples. The maximum FICO score you may get is 850. 4 Because each lender has its own technique, while one lender may accept your mortgage, another may not—even if both are using the same credit score.

While there are no industry-wide credit score standards, the following scale from the personal finance education website www.credit.org serves as a starting point for FICO scores and what each range represents when applying for a mortgage:

•740-850: Excellent credit – Borrowers get quick loan approvals and low interest rates.

•670-740: Strong credit – Borrowers with good credit are often accepted and provided favorable lending rates.

•620-670: Acceptable credit – Borrowers with higher interest rates are often authorized.

Subprime credit – 580-620 Borrowers may be able to get a mortgage, but this is not guaranteed. Terms will very certainly be negative. 2

•300-580: Bad credit – You have little to no chance of obtaining a mortgage. Borrowers must take actions to improve their credit score before getting authorized. 4 3

FHA Loans

The Federal Housing Administration (FHA), which is part of the United States Department of Housing and Urban Development, provides government-backed loans. 5 In general, credit standards for FHA loans are less stringent than those for conventional loans. A minimum FICO score of 580 is required to qualify for a low down payment mortgage (currently 3.5%). If your credit score is worse, you may still receive a mortgage, but you must put down at least 10%. 3

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Interest Rates and Your Credit Score

While no exact formula exists, your credit score has an impact on the interest rate you pay on your mortgage. In general, the lower your interest rate, the better your credit score, and vice versa. This may have a significant influence on your monthly payment as well as the amount of interest you pay throughout the life of the loan. Here’s an illustration: Assume you acquire a $200,000 30-year fixed-rate mortgage. If you have a good FICO credit score, such as 760, you may be eligible for an interest rate of 3.612%. At that rate, your monthly payment would be $910.64, and you would pay $127,830 in interest over the course of the 30 years.

Consider the same loan, but with a lower credit score—say, 635. Your interest rate rises to 5.201%, which may not seem like a significant change until you examine the facts. Your monthly payment is now $1,098.35 ($187.71 more per month), and your total loan interest is $195,406, or $67,576 more than the loan with the better credit score. A mortgage calculator can show you how various interest rates affect your monthly payment.

Before applying for a mortgage, it’s usually a good idea to enhance your credit score so you can receive the best conditions available. Of course, this does not always happen, but if you have the time to examine your credit report (and correct any errors) and pay down debt before applying for a mortgage, it will likely pay off in the long term. For additional information, look into the best strategies to improve your credit score rapidly or simply the best ways to repair a bad credit score. If you don’t have the time to work on your credit, it may be worth looking into one of the top credit repair businesses to do it for you.

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The Bottom Line

Even while there is no “official” minimum credit score, having a higher score will make it simpler to secure a mortgage—and the conditions will likely be better as well. Because most individuals have a credit score from each of the three major credit bureaus—Equifax, Experian, and TransUnion—lenders often request a “tri-merge” credit report, which includes ratings from all three bureaus. 6 If all three credit scores are valid, the middle score is referred to as the “representative,” or the one that is utilized. If only two possible scores are available, the lesser one is utilized. 7

You may acquire basic information on your situation for free. Every year, you are entitled to one free credit report from each of the three major credit bureaus. 8 A free credit score is more difficult to get, but you may obtain one from a bank, some of which are increasingly making them accessible, or through websites that provide really free credit ratings. 9

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