When you apply for a new credit card, or buy a new cell phone, you don’t have to wait days or weeks for a verdict on your credit. You find out almost instantly if you’ve been approved.
It’s a very different story when you submit a home mortgage application. Taking out a home loan will mean borrowing at least $100,000 and usually a lot more than that, since the median home price in America is now over $300,000. Mortgage lenders want to be completely sure you will actually be able to repay that enormous amount of money.
For that reason, they go through your personal finances and credit history with a fine-toothed comb before approving your mortgage loan. Final loan approval may not come until very late in the home buying process, only days before you’re ready to close on your new house.
First-time home buyers who are new to the mortgage process (and if you are, head over to our checklist for buying a house) shouldn’t panic, though. There’s one metric that matters more than any other when lenders are evaluating your creditworthiness – and if you score high on it, you’ll almost always get your mortgage.
If you haven’t guessed, that metric is your credit score (also called a FICO score, because the scale was created by the Fair Isaac Corporation). And you’re entitled to see it even before you begin house hunting.
Explaining Credit Scores
It would be nice if a single organization reported your credit score, and there was only one number to be concerned with. Unfortunately, things don’t work that way.
Three major credit bureaus collect and report information on your credit history: Equifax, Experian and TransUnion. They each have their own scoring models, so the actual credit score number that each comes up with will be slightly different. Most mortgage lenders average the three numbers to determine a final score, although some rely on just one credit bureau’s results.
Since all three bureaus work with the same FICO model, their scores are all reported on the same scale. The lowest possible score is 300 and the highest is 850; the average American’s score is 703. To help you understand what your score generally says about your credit rating, here’s Experian’s scale:
Exceptional credit: 800+
Very good credit: 740-799
Good credit: 670-739
Fair credit: 580-669
Poor credit: 300-579
How do you find out your credit score? You can get a free copy of your credit report once per year by contacting each of the three credit bureaus; that can easily be done online. You can also subscribe to a paid service like myFICO which gives you continual access to scores. Be careful, though; some free credit score and free credit report services estimate the numbers they give you, or use the alternative VantageScore model. Always be sure you’re getting the FICO scores from Experian, Equifax and TransUnion, since that’s what your lender will use.
Many factors are reflected in a credit score, including your previous payment history (whether you pay your bills on time), how many credit accounts you have and how much credit card debt you owe, how many different types of credit you have, your credit utilization ratio (it’s a bad sign if you’ve maxed out your credit cards), and how long you’ve had established credit accounts. Other factors used by banks to consider a mortgage application, like debt-to-income ratio, don’t factor into a FICO score.
Your credit score affects not only whether you’ll be able to get a mortgage, but the interest rate you’ll have to pay. If you have a poor credit score or a bad credit history (for example, missed payments or loan defaults), you’ll probably have to clean them up before you can get any sort of home loan. If you have fair or good credit you’ll likely be able to qualify for a mortgage, but taking steps to achieve a higher credit score will save you money over the life of your loan.
The Credit Scores You’ll Need to Get a Mortgage
A first look at the raw statistics aren’t encouraging for those with poor credit scores. According to the Federal Reserve, 90% of mortgages originated in the first three months of 2019 went to applicants with a credit score of 650 or above. Three quarters of them went to applicants with a score of at least 700.
Don’t despair. Those numbers mean it is possible to get a home loan with lower credit scores – particularly if you apply for the right mortgage programs. If you have a low credit score, though, you should search for a knowledgeable loan officer or mortgage broker because they can help guide you toward the right loan type.
Here’s what to expect.
With an exceptional, very good or good credit score of 700+, you’re eligible for the best conventional loans (fixed or adjustable rate mortgages which aren’t guaranteed by a government agency).
The higher your score is above 700, the better the mortgage rates you’ll receive. You’ll also be eligible for options such as jumbo loans for expensive homes with loan amounts over $500,000, and you may also be able to pay lower rates for private mortgage insurance, lowering your overall mortgage payment.
If your credit score is between 620 and 699, you will still usually have several options.
- The minimum credit score requirements for a conventional loan are 620 plus an otherwise spotless credit record, although those loans will come with higher mortgage interest rates and higher monthly payments.
- FHA loans (backed by the Federal Housing Administration) are definitely on the table for those in this credit score range. They’re a great option for first-time home buyers or those who are cash poor, since they can require a down payment as small as 3.5%.
- Scores of 640 or higher qualify for USDA loans as well, but are only available for properties in specific rural areas.
- Finally, VA loans backed by the Department of Veterans Affairs have no minimum FICO requirement and are available to active-duty military, veterans and their spouses.
With a credit score between 580 and 619 your options are definitely limited. However, some lenders will approve FHA loans in this range, and VA loans are usually available to those who qualify.
If you have a credit score under 580, lenders will be occasionally able to finance FHA loans (with higher down payments) or VA loans for applicants in the 500-580 range. It’s a long shot, but it never hurts to ask.
A poor credit score, though, usually means you’re out of luck when it comes to home ownership – at least until you spend some time working to improve your credit. Those who are looking to refinance rather than get a new home loan can use these same guidelines to evaluate their chances; the cut-off points are usually the same.