Your credit score is one of the most important factors lenders consider when applying for a mortgage. Generally, the higher your score, the lower the interest rates you qualify for.
Before looking at homes, it is a good idea to check your credit score and get your credit reports from the three major credit bureaus. Addressing credit problems early on can help you increase your score before applying for a mortgage.
What is a good credit score for buying a home?
When looking at the credit score needed to buy a home, many lenders use the FICO (Fair Isaac Corp.) model for credit scores. It scores consumers on a range of 300 to 850 points, with a higher score indicating lower risk to the lender.
- 800 or more: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: fair
- 579 or less: poor
How Your Credit Score Affects Your Mortgage Rate
While it is up to specific lenders to determine what score borrowers need to have to be offered the lowest interest rates, sometimes even a few points difference in your credit score can dramatically affect your monthly payments. For example, the difference between an interest rate of 3.5% and a rate of 4% on a mortgage loan of $ 200,000 is $ 56 per month. This is a difference of $ 20,427 over a 30-year mortgage term.
âA low credit score can reduce the likelihood that you will qualify for the most affordable rates and could even result in your mortgage application being rejected,â says Bruce McClary, spokesperson for the National Foundation for Credit Counseling. âIt’s still possible to be approved with a low credit score, but you may need to add a co-signer or reduce the overall amount you plan to borrow. “
You can use Bankrate’s loan comparison calculator to help you see interest rates from credit scores.
Using myFICO.com’s Credit Savings Calculator, here’s how much you would pay at current rates for each credit score range. These examples are based on national averages for a 30-year fixed loan of $ 300,000.
|How Your Credit Score Affects Your Mortgage Rate|
|FICO score||APR||Monthly payment||Total interest paid||Price changes|
|760-850||2.695%||$ 1,216||$ 137,761||If your score increases to 700-759, you can To pay an additional $ 12,752.|
|700-759||2.917%||$ 1,251||$ 150,512||If your score increases to 760-850, you can save an additional $ 12,752.|
|680-699||3.094%||$ 1,280||$ 160,826||If your score increases to 700-759, you can save an additional $ 10,314.|
|660-679||3.308%||$ 1,315||$ 173,468||If your score increases to 700-759, you can save an additional $ 22,955.|
|640-659||3.738%||$ 1,387||$ 199,430||If your score increases to 660-679, you can save an additional $ 25,962.|
|620-639||4.284%||$ 1,482||$ 233,447||If your score increases to 640-659, you could save an additional $ 34,017.|
Why your credit score matters to lenders
Your credit score helps lenders determine your ability or inability to pay off the mortgage. As part of your scores, they look at your debt-to-income ratio. This is the percentage of monthly debt compared to what you earn.
To illustrate, if you earn $ 4,000 per month and have $ 1,250 in credit cards, loans, housing, and other payments, your ratio would be 31%. The ideal ratio is less than 36%, although some lenders will accept more with a higher down payment.
Minimum credit score by type of mortgage
Here’s a quick look at typical minimum credit scores for different types of loans:
- Conventional loans: Many lenders will accept a credit score as low as 620 for conventional loans, but they may have other requirements for these borrowers, such as higher income.
- FHA loans: The Federal Housing Administration guarantees loans to borrowers with bad credit and low down payments. You can qualify for an FHA loan with a credit score of 500 to 579 with a 10% down payment. Borrowers with a score of 580 or higher can deposit as little as 3.5 percent.
- USDA Loans: The US Department of Agriculture supports the USDA loan program for low- and moderate-income borrowers who buy a home in a rural area. Borrowers generally need a minimum score of 640 to qualify for a USDA loan. In some cases, USDA lenders will consider a lower score with additional analysis of a borrower’s credit.
- AV loans: Backed by the US Department of Veterans Affairs, VA loans are available to serving and veteran military personnel and their families. The government does not have a minimum credit score requirement to qualify for VA loans, although many lenders require a minimum score of 620.
- Jumbo loans: These loans have loan amounts that exceed compliant loan limits – currently $ 548,250 in most markets – and are the hardest to get if you have bad credit. Many jumbo lenders require a credit score of 720 or higher to qualify due to the increased risk.
Can I get a mortgage with a low credit score?
It is possible to get a mortgage with a low credit score, but you will be paying higher interest rates and monthly payments. Lenders can be stricter on other aspects of your finances, such as the amount of your debt, if your credit is damaged.
Keep in mind that credit requirements vary from lender to lender. Shop around for several lenders to find one that will work for you.
How To Improve Your Credit Score For Buying A Home
If your credit score isn’t good, there are still options. Instead of settling for the mortgage rates you currently qualify for, consider postponing homeownership and working to boost your score and improve your options. Here are some quick tips to help you:
- Check your credit report and correct any errors: Before you apply for a mortgage, request a copy of your credit reports from the three major credit reporting agencies: Experian, Equifax, and TransUnion. You are entitled to a free credit report from each of the agencies once a year. If you find any inaccurate or missing information, file a dispute with the credit reporting agency and the creditor. Clearly identify each item you are disputing and be sure to include supporting documents.
- Pay off your credit card balances below 30% of your credit limit: Your credit utilization rate is the amount of your debt compared to your available credit. To calculate this, divide the amount of debt by the amount of credit available. If you have $ 10,000 in debt and $ 20,000 in available credit, for example, your credit utilization rate is 50%. Lenders like to see a credit usage of 35% or less.
- Pay all bills on time: Your payment history represents 35% of your credit score. Although late payments stay on your credit report for seven years, their impact on your score decreases over time.
- Don’t close old lines of credit after you’ve paid them off: Closing unused accounts seems like a good idea, but it can increase your credit utilization rate and your credit score may drop.
- Don’t open new lines of credit or take out big loans: The less debt you have, the better off you are. FICO recommends that you do not open new credit accounts to increase your credit utilization rate, as each credit application may lower your score slightly. When your credit has improved, shop within 30 days. Spreading rate requests can hurt your score. You can also use our mortgage calculator to estimate your monthly mortgage payments.
At the end of the line
Improving your credit score doesn’t happen overnight, but these steps will dramatically increase your score over time so you can buy a home with the best mortgage rate.
The way you pay your bills, the number of credit accounts you have, and the way you manage them affect your credit score – and your credit score has a major impact on your mortgage rate and your monthly payment.