Your credit score, the number lenders use to estimate the risk of extending you credit or lending you money, is a key factor in determining whether you will be approved for a mortgage. The score is not a fixed number but fluctuates periodically depending on changes in your credit activity (for example, if you open a new credit card account). Which number is good enough, and how do the scores influence the interest rate that is offered to you? Read on to find out.
The most common credit score is the FICO score, which was created by Fair Isaac Corporation. It is calculated using the following different data from your credit report: your payment history (which represents 35% of the score), the amounts you owe (30%), the duration of your credit history (15%), your types of credit you use (10%) and new credit (10%).
Minimum credit scores
There is no “official” minimum credit score since lenders can (and take) other factors into account in determining whether you qualify for a mortgage. You can be approved for a mortgage with a lower credit score if, for example, you have a solid down payment or your debt is low. Since best fha lender consider your credit score as one piece of the puzzle, a low score will not necessarily prevent you from getting a mortgage.
What lenders like to see
Since there are different credit scores (each based on a different rating system) available to lenders, make sure you know the score that your lender uses to compare apples. A score of 850 is the highest FICO score you could get, for example, but that number would not be as impressive on the TransRisk Score (developed by TransUnion, one of the three major credit reporting agencies), That goes to the end Every lender also has his own strategy, while a lender can approve your mortgage, another can not – even if both use the same credit score.
Although there are no industry-wide standards for credit scores, the following scale of personal financial education 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 rate.
- 680 – 740: Good credit – borrowers are generally approved and offer good interest rates.
- 620 – 680: acceptable credit – borrowers are generally approved rate.
- 550 – 620: Subprime credit – possible to obtain a mortgage, but not guaranteed. The terms will probably be unfavorable.
- 300 – 550: Bad credit – little or no chance of getting a mortgage. Borrowers will need to take steps to improve the credit score before being approved.
The Federal Housing Administration (FHA), part of the US Department of Housing and Urban Development, provides loans that are supported by the government. In general, the credit requirements for FHA loans tend to be more relaxed than those for conventional loans. To qualify for a low down payment mortgage (currently 3.5%), you will need a minimum FICO score of 580. If your credit score falls below, you can still get a mortgage, but you must deposit at least 10%, which is still less than what you would need for a conventional loan.
Interest rate and credit score
Although there is no specific formula, your credit score affects the interest rate you pay on your mortgage. In general, 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 during 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%. At this rate, your monthly payment would be $ 910.64, and you’ll end up paying $ 127,830 in interest over 30 years.
Take the same loan, but now you have a lower credit score – say, 635 Your interest rate climbs to 5.201%, which may not seem like a big difference – until you understand the numbers. Now your monthly payment is $ 1,098.35 ($ 187.71 more each month) and your total interest for the loan is $ 195,406, or $ 67,576 more than the loan with the credit score on higher.
your credit score before applying for a mortgage, so that you get the best deal possible. Of course, this does not always work that way, but if you have the time to check your credit report (and correct the mistakes) and pay off your debts before applying for a mortgage, you will probably be paying back long term. See what are the best ways to rebuild my credit score quickly and the best ways to repair your credit score.
The bottom line
Even if there is no “official” credit score, it will be easier to get a mortgage if your score is higher – and the conditions will probably be better. Because most people have a score from each of the three major credit bureaus – Equifax, Experian, and TransUnion – lenders often draw a “tri-merge” credit report that contains scores from all three agencies. If the three credit scores are usable, the intermediate score is what is called the “representative” score, or the one that is used. If only two scores are usable, the lowest score is used.
You can get preliminary information about your position: Each year you are entitled to a free credit report from each of the three major creditors. agencies. Getting a free credit score is more difficult, but a growing number of banks and credit card companies make them available, just like some websites.