The spring selling season is almost here, and for homebuyers attending open homes, it's best to go in pre-approved for a mortgage.
And that means those applying for financing will need to be prepared to share their financial details, which includes a strong credit score.
Lenders look at FICO (Fair Isaac Corporation) credit scores when people apply for a mortgage. The credit score will play a role in determining whether you qualify for a mortgage and the interest rate. The higher the credit score, the lower the interest rate you'll qualify for.
The credit score you need will vary depending on the type of loan. A score of 620 is a "fair" rating, but people applying for a Federal Housing Administration loan may be able to get approved with a credit score of 500, which is considered a low score.
"For starters, if your credit score is below the mid-600s, you might not even be approved. And even if you are approved, having a lower score means a higher interest rate, which can really add up over 30 years," Ted Rossman, Bankrate senior industry analyst, tells Realtor.com®.
Why your credit score matters
Different types of mortgage loan programs have their own minimum credit score requirements.
Some lenders have stricter criteria when evaluating whether to approve you for a loan. They want to make sure you're able to pay back the loan.
"Different lenders and loan types have different credit score requirements," explains Hannah Jones, senior economic research analyst at Realtor.com. "Generally, borrowers with a low credit score will be limited in the type of loan they can take out, and may have additional requirements on down payment size or minimum income level."
Experian, one of the main credit bureaus, identified the minimum credit scores by home loan type.
Conventional loan: 620 minimum credit score
A conventional loan requires a minimum credit score of 620. Conventional loans are not insured by a government agency and follow certain standards set by the government-sponsored entities Fannie Mae and Freddie Mac. These are the most commonly used mortgage loans.
Jumbo loan: 700 minimum credit score
A jumbo loan is a conventional loan that does not meet the requirements to be a conforming loan because of the higher loan amount. Usually, jumbo-loan lenders require a credit score of 700 or higher.
FHA loan: 500 minimum credit score
An FHA loan requires a minimum credit score of 500, if you make a 10% down payment on your home purchase. If you put down less than that, the minimum credit score required is 580. These loans are insured by the Federal Housing Administration.
VA loan: 620 minimum credit score
The U.S. Department of Veterans Affairs has no minimum credit score set, but lenders who provide VA loans usually require a score of 620 or higher. VA loans were created for eligible members of the military and other eligible beneficiaries.
USDA loan: 580 minimum credit score
A USDA loan does not have a minimum credit score set by the federal agency, but lenders may require a score of at least 580 to 620. These loans are insured by the U.S. Department of Agriculture and are meant for low- and moderate-income homebuyers who want to buy a home in a rural area.
Credit scores and mortgage rates
A difference of a few points in your credit score could make a huge difference in your monthly mortgage payment. That's because it's up to lenders to determine what score a borrower needs to receive the lowest mortgage interest rate.
It's possible to still be approved for a loan with a low credit score, but you might need to have a co-signer.
A co-signer is responsible for the debt if you are not able to pay. If you miss any payments, it could also damage your co-signer's credit.
"Piggybacking off someone else's good credit—like getting on a parent's credit card as an authorized user—is a step that can jump-start the building of a credit score (since many young adults have little to no credit information on file) and can help rebuild a credit score after a prior misstep as well," explains Rossman.
Here's an idea of how much you could pay based on various credit score ranges, according to Bankrate. The examples are based on the national average for a 30-year fixed mortgage loan of $300,000.
760–850 FICO score
APR: 7.208%
Monthly payment: $2,038
Total interest paid: $433,676
Price change: If your score drops to 700–759, you could pay an extra $16,084
700–759 FICO score
APR: 7.427%
Monthly payment: $2,083
Total interest paid: $449,760
Price change: If your score rises to 760–850, you could save an extra $16,084
680–699 FICO score
APR: 7.533%
Monthly payment: $2,104
Total interest paid: $457,594
Price changes: If your score rises to 700–759, you could save an extra $7,833
660-679 FICO score
APR: 7.593%
Monthly payment: $2,117
Total interest paid: $462,041
Price changes: If your score rises to 680–699, you could save an extra $4,448
640-659 FICO score
APR: 7.685%
Monthly payment: $2,136
Total interest paid: $468,880
Price changes: If your score rises to 660–679, you could save an extra $6,839
620-639 FICO score
APR: 7.809%
Monthly payment: $2,161
Total interest paid: $478,133
Price changes: If your score rises to 640–659, you could save an extra $9,253
How to boost your credit score
It's important to know your credit score before you apply for a mortgage. It will allow you to understand what kind of loan you qualify for and how much money you can borrow for a home. If you discover you have a low score, there are ways to increase it.
Credit report: First, check your credit report and check for any errors. You should request reports from the three major credit agencies: Experian, Equifax, and TransUnion. You're allowed to access your credit reports from each bureau once a year. If you spot any errors, file a dispute with the credit reporting agency and the creditor.
Credit card balances: Pay down any debt. Bankrate says your credit utilization ratio is the amount of debt you have compared with your available credit. For example, if you have $10,000 in debt and $20,000 in available credit, your credit utilization is 50%. Lenders prefer to see credit utilization of 30% or less.
Pay bills: Not only should you pay your bills, but you also need to pay your bills on time. Payment history accounts for 35% of your credit score. Late payments stay on your credit report for seven years.
Don't cut cards: Even if you paid down a credit card, it's not advised to close older credit lines after paying them off. Closing unused accounts might raise your credit utilization ratio and cause your score to drop.
No new lines of credit: FICO recommends not opening new credit cards to increase your credit utilization ratio. Each credit request can lower your score.
"Generally, lenders consider the full picture, not only a borrower's credit score. Income, outstanding debt, credit score, and loan size will all impact the mortgage rate a lender offers," says Jones.
Source: Joy Dumandan Realtor.com
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