Your credit score is one of the most important factors lenders consider when you apply for a mortgage. Typically, the higher your score, the lower the interest rates you’ll qualify for.
Before you look at houses, it’s smart to check your credit score and pull your credit reports from the three major credit agencies. Addressing credit issues early on can help you raise your score before you apply for a mortgage.
What is a good credit score for buying a house?
When considering what credit score is needed to buy a house, many lenders use the FICO (Fair Isaac Corp.) model for credit scores. It grades consumers on a 300- to 850-point range, with a higher score indicating less risk to the lender.
- 800 or higher: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 579 or lower: Poor
How your credit score affects your mortgage rate
Although it’s up to specific lenders to determine what score borrowers must have to be offered the lowest interest rates, sometimes even the difference of a few points on your credit score can affect your monthly payments substantially. For example, the difference between a 3.5 percent interest rate and a 4 percent rate on a $200,000 mortgage is $56 per month. That’s a difference of $20,427 over a 30-year mortgage term.
“A low credit score can make it less likely that you would qualify for the most affordable rates and could even lead to rejection of your mortgage application,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling. “It’s still possible to be approved with a low credit score, but you may have 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 for credit scores.
Using myFICO.com’s loan savings calculator, here’s how much you’d pay at the 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 changes to 700-759, you could pay an extra $12,752. |
| 700-759 | 2.917% | $1,251 | $150,512 | If your score changes to 760-850, you could save an extra $12,752. |
| 680-699 | 3.094% | $1,280 | $160,826 | If your score changes to 700-759, you could save an extra $10,314. |
| 660-679 | 3.308% | $1,315 | $173,468 | If your score changes to 700-759, you could save an extra $22,955. |
| 640-659 | 3.738% | $1,387 | $199,430 | If your score changes to 660-679, you could save an extra $25,962. |
| 620-639 | 4.284% | $1,482 | $233,447 | If your score changes to 640-659, you could save an extra $34,017. |
Why your credit score matters to lenders
Your credit score helps lenders determine your ability or inability to repay the mortgage. As part of your scores, they examine your debt-to-income ratio. It is the percentage of monthly debt obligations relative to how much you make.
To illustrate, if you earn $4,000 per month, and have $1,250 in credit card, loans, housing, and other payments, your ratio would be 31 percent. The ideal ratio is less than 36 percent, though some lenders will accept more with a higher down payment.
Credit score minimums by mortgage loan type
Here’s a quick rundown of typical minimum credit scores for different loan types:
- Conventional loans: Many lenders will accept a credit score as low as 620 for conventional loans, but they may have other requirements for those borrowers, such as higher income.
- FHA loans: The Federal Housing Administration guarantees loans for borrowers with tainted credit and low down payments. You can qualify for an FHA loan with a credit score of 500 to 579 with a 10 percent down payment. Borrowers with a score of 580 or higher can put down as little as 3.5 percent.
- USDA loans: The U.S. Department of Agriculture backs the USDA loan program for low- to moderate-income borrowers purchasing 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.
- VA loans: Backed by the U.S. Department of Veterans Affairs, VA loans are offered to active and veteran military personnel and their families. The government doesn’t have a minimum credit score requirement to qualify for VA loans, though many lenders require a minimum score of 620.
- Jumbo loans: These loans have loan amounts that exceed conforming loan limits — currently $548,250 in most markets — and are the hardest to qualify for if you have bad credit. Many jumbo lenders require a credit score of 720 or higher to qualify because of 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’ll pay higher interest rates and higher monthly payments. Lenders may be more stringent about other aspects of your finances, such as how much debt you have, if your credit is tarnished.
Keep in mind that credit requirements vary from lender to lender. Shop around with multiple lenders to find one that will work with you.
How to improve your credit score to buy a house
If your credit score isn’t great, there are still options. Instead of settling for the mortgage rates you’re currently qualified for, consider postponing homeownership and working to revive your score and improve your options. Here are some quick tips to help:
- Check your credit report and correct any errors: Before applying for a mortgage, request a copy of your credit reports from the three major credit reporting agencies: Experian, Equifax and TransUnion. You’re entitled to a free credit report from each of the agencies once a year. If you find inaccurate or missing information, file a dispute with the credit reporting agency and the creditor. Clearly identify each item you’re disputing and be sure to include supporting documents.
- Pay down credit card balances to below 30 percent of your credit limit: Your credit utilization ratio is the amount of debt you have compared with your available credit. To calculate this, divide the amount of debt into the amount of available credit. If you have $10,000 in debt and $20,000 in available credit, for instance, your credit utilization ratio is 50 percent. Lenders like to see credit utilization of 35 percent or less.
- Pay all bills time: Your payment history accounts for 35 percent of your credit score. While late payments stay on your credit report for seven years, their impact on your score diminishes over time.
- Don’t close older credit lines after paying them off: Closing unused accounts sounds like a good idea, but it may raise your credit utilization ratio and your credit score can drop.
- Don’t open any new lines of credit or take out large loans: The less debt you have, the better off you are. FICO recommends not opening new credit accounts to increase your credit utilization ratio because each credit request can slightly lower your score. When your credit has improved, rate-shop within a 30-day window. Spreading out the rate inquiries can hurt your score. You can also use our mortgage calculator to estimate your monthly mortgage payments.
Bottom line
Improving your credit score doesn’t happen overnight, but taking these steps will greatly raise your score over time so you can buy a house with the best mortgage rate.
How you pay your bills, the number of credit accounts you have and how you manage them affect your credit score — and your credit score has a major impact on your mortgage rate and your monthly payment.
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