- FICO Score
- Minimum credit score
- What lenders like to see
- FHA Loans
- Interest rates and your credit score
- The Bottom Line
Your credit score, the number lenders use to estimate the risk of extending your credit or loan, is a key factor in determining whether you’ll be approved for a mortgage. The score is not a fixed number, but fluctuates regularly in response to changes in your credit activity (z. B. if you open a new credit card account). What number is good enough, and how do the scores affect the interest rate you offer? Read on to find out.
The most common credit score is the FICO score, created by the Fair Isaac Corporation. It is calculated using the following data from your credit report: Your payment history (which represents 35% of the score), the amounts you owe (30%), the length of your credit history (15%), types of credit you use (10%) and new credit (10%).
Minimum credit value
There is no “official” minimum credit score, as lenders can (and do) consider other factors when qualifying for a mortgage. You may be approved for a mortgage with a lower credit score if, for example, you have a solid down payment or your debt load is otherwise low. Since many lenders see your credit score as just one piece of the puzzle, a low score won’t necessarily prevent you from getting a mortgage.
What lenders like to see
Since there are different credit scores (each based on a different scoring system) available to lenders, make sure you know what score your lender uses so you can compare apples to apples. A score of 850 is the highest FICO score you could get, for example, but that number wouldn’t be quite as impressive on the TransRisk Score (developed by TransUnion, one of the three major credit reporting agencies). up to 900. Each lender also has its own strategy, so while one lender may approve your mortgage, another may not – even if both use the same credit score.
While there are no industry-wide standards for credit scores, the following scale from the personal finance education website www. Credit. org serves as a starting point for FICO scores and what each range means to get a mortgage:
– 740 – 850: Excellent credit – easy credit approvals and the best interest rates.
– 680 – 740: Good credit – Borrowers are usually approved and offer good interest rates.
– 620 – 680: Acceptable credit – borrowers are generally approved for higher interest rates.
– 550 – 620: subprime credit – possible to get a mortgage, but not guaranteed. The terms will probably be unfavorable.
– 300 – 550: Bad credit – little to no chance of getting a mortgage.Borrowers must take steps to improve credit score before being approved.
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development, offers loans that are backed by the federal government. In general, credit requirements for FHA loans tend to be more relaxed than for conventional loans. To qualify for a low down payment mortgage (currently 3, 5%), you need a minimum FICO score of 580. If your credit score falls below this, you can still get a mortgage, but you must have at least 10%, which is still less than you would need for a conventional loan.
Interest rates and your credit score
While there is no specific formula, your credit score will affect the interest rate you pay on your mortgage. Generally, the higher your credit score, the lower your interest rate and vice versa. This can have a huge impact on your monthly payment and the amount of interest you pay over the life of the loan. Here’s an example: Let’s say you get a 30-year fixed-rate mortgage for $200, 000. If you have a high FICO credit score – for example, 760 – you could get an interest rate of 3. 612% received. At this rate, your monthly payment would be $910. 64, and you would end up paying $127, 830 in interest over the 30 years.
Take out the same loan, but now you have a lower credit score – say, 635. Your interest rate jumps to 5. 201%, which may not sound like a big difference – until you crunch the numbers. Now your monthly payment is $ 1, 098. 35 ($ 187. 71 more each month), and your total interest on the loan is $195, 406 or $67, 576 more than the loan with the higher credit score.
It’s always a good idea to improve your credit score before applying for a mortgage so you can get the best terms. Of course, it doesn’t always work out that way, but if you have the time to review things like your credit report (and fix errors) and pay down debt before applying for a mortgage, it will likely pay out in the long run. See What are the best ways to restore my credit score quickly and Best ways to repair your credit score.
The Bottom Line
Even though there are no “official” minimum credit scores, it’s easier to get a mortgage if your score is higher – and the terms will likely be better, too. Because most people have a score from each of the big three credit agencies – Equifax, Experian and TransUnion – lenders often pull a “tri-merge” credit report that includes scores from all three agencies. If all three credit scores are usable, the middle score is what is called the “representative” score, or the one that is used. If only two points are usable, the lower one is used.
You can get preliminary information about where you stand for free: Each year, you are entitled to a free credit report from each of the three major credit bureaus. A free credit score is more difficult, but an increasing number of banks and credit card companies are making them available, as are some websites (see Getting your credit score from a bank and websites that offer a ‘True’ Free Credit Score ).