What is a Good Credit Score for a Mortgage?
There are many reasons why you want to learn your credit score. Your credit score can affect qualifying for an auto loan or credit card, renting an apartment, and getting utility service. Getting a mortgage isn’t any different and knowing the right credit score for mortgage applications is going to be necessary.
Your current score is going to determine your interest rate and other costs you pay on your loan. If your credit score is low then lenders will see you as risky and, if you are approved for a loan, you likely will be charged a higher rate in order to protect the risk they are taking on. If your score is high then this shows lenders that you haven’t maxed out your credit cards, you pay your bills on time, and you will be more likely to pay the loan on time.
How a Lender Views Your Credit Score for Mortgage Applications
Your credit score is a numerical representation of where your credit profile is. Different credit models can give different scores that vary but each one is based on different factors that look at how you have used your credit. A lender uses your credit score, just like you would if your friend asked you to borrow money. Did he pay you back last time? Was it on time? If you answered yes to these questions then you may be more likely to lend your friend money again. A good credit score is the “yes” to these questions so they are more likely to give you the money you need for a home.
The Minimum Credit Score for Mortgage Applications for Conventional Loans
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Almost every lender will have a baseline credit score that is used to deny or approve mortgage applicants. A score in the 700s or higher is considered excellent and will likely get you a loan with a much better interest rate. If your score is in the 600s then you can start to be seen as a risk. For example, a score of 680 is still good but if you are below 660 then some lenders will start to deny your application. For some lenders, 640 to 620 won’t approve you. It will depend on the lender and the required qualifications. These minimum cut-off points are for fixed rate conventional mortgages. Other types of loans, such as a VA or FHA loan, are typically easier to qualify for and are designed for a borrower with a score as low as 500.
Minimum Credit Score for Mortgage Applications for Non-Conventional Loans
If you don’t have the score for a conventional loan then you may be able to get some other loan options. Loans that are backed by the Federal Housing Administration, called FHA loans, are designed to help you get into your first home. The same lenders that also have conventional loans, including credit unions and banks, issue these loans but there are different guidelines. You are able to get an FHA loan with a score as low as 500. However, those who have this low of a score will need to have a 10% down payment in order to qualify. Those with a credit score of 580 or higher are able to qualify with a down payment of 3.5%.
Home loans backed by the U.S. Department of Agriculture, also known as USDA loans, are designed to help low- to moderate-income families and individuals buy homes in non-urban areas. There are three different types of USDA home loans. Mortgage rates and the limits on USDA loans will change depending on what part of the country you are exploring and the property values. There is no specific minimum credit score requirement for USDA loans.
Loans backed by the U.S. Department of Veteran Affairs, also called VA loans, are for veterans, surviving spouses, and qualifying service members. These loans allow these individuals to buy a home with little to no down payment and without any private mortgage insurance requirements. Issuers have some discretion when it comes to setting the minimum score requirements.
Tips for Getting Approved for a Mortgage
If know you have a good credit score for mortgage applications then there are some things you can do to start the preapproval process on the right foot.
Gather Documents
You will need to gather a lot of your financial documents and records. This will be especially true if your score is on the lower end. Get as organized as possible before you apply for a mortgage to make the process easier. You will likely need bank statements, tax returns, W2s, pay stubs, and a list of debts to get started.
Work on Improving Your Credit
Learn where your credit currently stands and follow some of the tips in order to improve it.
Consider a Co-Signer
If your credit isn’t that great but you still want access to better mortgage rates then you may want to consider a co-signer. A co-signer can help you if you have poor credit history and increase your chance of loan approval. In order for a co-signer to be beneficial to you, he or she must have better credit than you currently do. Co-signers will also be on the hook if you default on your mortgage so it is a big favor to ask of someone.
What Does Your Credit Score Mean?
Your credit score is going to be a number between 300 and 850 that shows your creditworthiness. The higher the score, the better you will look to potential lenders. Your score will be based on a number of different factors.
How Does a Credit Score Work?
A credit score has a big impact on your financial life. If your score is below 640 then you may be considered a subprime borrower. If you are a subprime borrower, you will be paying more for any credit you take out, including a mortgage. A score above 700 is usually considered good and can mean that you pay less money in interest over the life of your loan. Scores that are above 800 are considered excellent, which means you will be getting the best rates and have the easiest time qualifying for a mortgage or other forms of credit. Every credit bureau defines its range of scores but on average, the FICO range is used. You can see where you fall in this credit rating scale:
There are three main credit agencies: Transunion, Experian, and Equifax. These agencies report and update your score. There may be some differences in the information collected but there are still five factors that matter when calculating your credit score. These factors are payment history, the total amount of debt, credit history length, types of credit, and new credit. Your payment history is the biggest factor.
Are You Able to Buy a House with Bad Credit?
Just because you may not have the minimum credit score for mortgage applications on conventional loans, it doesn’t mean that you won’t be able to buy a home. If your score is in the 500s then you can get a bad credit home loan or a subprime loan. These loans will have much higher interest rates and much higher fees but they are still available to you. A higher interest rate can lead to you paying a significantly higher amount over the life of the loan. While it’s possible to buy a home with bad credit, it is going to cost you more money each month and over the life of the loan.
Tips to Boost Your Credit Score
If you want to get a better rate on a mortgage or be able to qualify, there are some options and some tips that can help you boost your credit score.
Before you begin the process of applying for a mortgage, check your credit report for any errors. You are allowed to receive a free report from the three credit bureaus once every year. If you find missing or inaccurate information then file a dispute with the credit reporting agency. Be sure that you can clearly identify each item you are going to dispute and have the supporting documents to make the process easier.
Part of your credit score looks at credit utilization, which is the ratio of current debt to your credit limit. You should pay down enough of the balance so that your ratio is below 30%. Lenders will want to see that it is below 35% before giving approval for a mortgage.
Paying your bills on time makes up a big chunk of your credit score. Late payments can stay on your credit report for seven years but the impact will diminish over time.
Even after you may have paid down an account, you still don’t want to close these accounts. It may seem like a good idea but it can increase your credit utilization ratio and your credit score can drop. The longer you have credit history, the better it is for your score.
The less debt you have, the better you will be when it comes time to take out a mortgage. You shouldn’t open new credit lines just to increase your credit utilization ratio since this can lower your score. When your credit has improved, keep rate shopping within a 30-day window. If you spread out your rate inquiries, it can hurt your score. Every time you go to open a new line of credit, you will have a hard credit inquiry, which lowers your score for a temporary time period. Too many inquires can mean you are shopping around for credit and it can look bad.
Even after you have already applied for a mortgage, you still need to be working on your credit. Lenders are going to be required to check your credit again before the loan is finalized. Wait until your loan is fully funded and you have the keys to your home before you do things such as increase your credit utilization, close accounts, or apply for a new line of credit. It can be tempting to start shopping for furniture and new things for your home but if it changes your credit score, it can jeopardize your loan going through.
How Your Credit Score Affects Your Mortgage Rates
There are a number of ways that your credit score can affect your mortgage rates and why it’s important to pay attention to it.
Risk Based Pricing
A mortgage is mostly based on risk based pricing. This means that your lender will increase your mortgage costs for every risk associated with your credit profile. If you have a lower score, this means you are paying more for your mortgage. For example, the difference between a score of 625 and 750 can add about half a percent to the rate you pay for the loan. If you have a score of 750, it could qualify you for a 30-year mortgage at 3.625% and if your mortgage is for $200,000 then this means you have a monthly payment of $912. If your credit score is only 625 then your rate could be about 4.125%. The same terms and size of mortgage would mean that you are paying $969 a month. This may only be $57 a month but then over the life of the loan, you are now paying $20,520 more.
Your Credit History Can Affect Loan-to-Value Ratio
Besides the rate, your credit history and score can also impact how much you are able to borrow for a property. The loan-to-value ratio, or LTV, is the percentage of a property sale price that you will be able to borrow up to. Under some mortgage programs, the lender will limit how low they will go on this if your score is below a certain point. This can be true for non-conforming loan products, such as jumbo loans. If you have a score of 750, you could borrow up to 95% of the property value, but if you have a score of 650, you may only be able to borrow 80% of the value.
You May Not Qualify for Certain Programs
If you have a low credit score and impaired credit history, you may not be able to get certain loan programs at all. For conventional financing, you aren’t able to get a mortgage if your credit score is below 620. This is also especially true for purchasing second homes or investment properties since both mean extra risk for the lender. A low credit score may mean you are completely ineligible.
The Leniency of Underwriting
Your credit history is not a standalone issue for the mortgage approval process. A strong credit history will allow your lender to be more lenient in other areas where you may be weaker, such as down payment, cash reserves, or income. However, if you have a poor credit history and lower score then the lender will likely be stricter on all the requirements for the other areas. If you have a credit score above 750 but your employment history is weak then the lender will usually still approve the loan. However, if your score is 650 and you still have a weak unemployment history then the lender can decide that this combination is not worth the risk. The higher your score, the more flexibility you have.
Can Impact Private Mortgage Insurance (PMI)
It’s not talked about a lot but your credit score may also affect what you are paying for private mortgage insurance. You are required to have PMI if you make a down payment that is less than 20% of the purchase price of the property or you have less than 20% equity for a refinance. This helps protect the lender in case you default on the loan. The PMI company takes into account your credit history when calculating the cost of the insurance. For example, if you have a score of 760 or greater then you may only be paying $90 a month on a $200,000 mortgage. However, if the score is less than 679 then you could be paying $192 a month, which is twice the amount you would be paying if you had a better score.
In Conclusion
There is no right answer when it comes to a good credit score for a mortgage. It’s important to understand how a credit score works and what your score is before you apply for a mortgage. Your credit score not only affects your chances for getting a mortgage but it can also affect the rate you are paying and other costs associated with the loan. Every lender is going to have some different requirements and it will also depend on what type of mortgage you are interested in. There are some things you can do to improve your credit score in order to get a better rate.