Is My Credit Score Good Enough for a Mortgage?

Reviewed by Andy SmithReviewed by Andy Smith

No specific credit score will qualify you for a mortgage because lenders look at multiple factors, and your credit score is just one of them. Your credit score, a number that lenders use to estimate the risk of extending credit or lending money, is a key factor in determining if you will be approved for a mortgage. The score isn’t a fixed number but fluctuates periodically in response to changes in your credit activity (for example, if you open a new credit card account).

Key Takeaways

• In general, a credit score above 670 will allow potential mortgage borrowers access to prime or favorable interest rates on their loans.
• Scores below 620 are considered subprime and come with higher interest rates and more restrictions due to their greater risk to lenders.
• You’ll need at least a 580 FICO credit score to qualify for a low down payment FHA-backed loan.
• Those with worse credit may still be able to obtain a mortgage from specialty lenders but will pay even higher rates, require larger down payments, may require a guarantor or co-borrower, and be subject to income verification.

How Are FICO Scores Determined?

The most common credit score is the FICO score, which was created by Fair Isaac Corporation. It is calculated using the following different bits of data from your credit report:

• Your payment history (which represents 35% of the score)
• Amounts you owe (30%)
• Length of your credit history (15%)
• Types of credit you use (10%)
• New credit (10%)

What Is the Minimum Credit Score to Qualify for a Mortgage?

There is no “official” minimum credit score since lenders consider additional factors when determining if 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 load is otherwise low. Since many lenders view 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 various credit scores (each based on a different scoring system) available to lenders, make sure you know which score your lender is using so you can compare apples to apples. A score of 850 is the highest FICO score you could get. Each lender also has its own strategy, so while one lender may approve your mortgage, another may not—even when 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 for getting a mortgage: 

• 740–850: Excellent credit – Borrowers get easy credit approvals and the best interest rates.

• 670–740: Good credit – Borrowers are typically approved and offered good interest rates.

• 620–670: Acceptable credit – Borrowers are typically approved at higher interest rates.

• 580–620: Subprime credit – Borrowers can get a mortgage, but not guaranteed. Terms will probably be unfavorable.

• 300–580: Poor credit – There is little to no chance of getting a mortgage. Borrowers will have to take steps to improve their credit scores before being approved.

FHA Loans

The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development, offers loans that the government backs. 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’ll need a minimum FICO score of 580. If your credit score falls below that, you can still get a mortgage, but you’ll have to put down at least 10%.

Interest Rates and Your Credit Score

While there’s no specific formula, your credit score affects the interest rate you pay on your mortgage. Usually, the higher your credit score, the lower your interest rate, and vice versa. This can have a huge impact on both 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 might get an interest rate of 3.612%. At that rate, your monthly payment would be $910.64, and you’d end up paying $127,830 in interest over the 30 years.

Take the same loan, but now you have a lower credit score—say, 635. Your interest rate jumps to 5.201%, which might 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 for the loan is $195,406, or $67,576 more than the loan with the higher credit score. A mortgage calculator can show you the impact of different rates on your monthly payment.

Improving your credit score before applying for a mortgage is always a good idea so you get the best terms possible. Of course, it doesn’t always work out that way, but if you have the time to check your credit report (and fix any mistakes) and pay down debt before applying for a mortgage, it will likely pay off in the long run. For more insight, you might want to investigate the best ways to rebuild your credit score quickly or simply the best ways to repair a poor credit score. Alternatively, if you don’t have the time to fix your credit score, it might be worth looking into one of the best credit repair companies to do it for you.

How Can I Check My Credit Score?

Many banks, credit unions, credit card providers, or other institutions offer free credit scores as a perk for having an account. Check with the institutions where you do your banking and see if this is offered.

How Do I Check My Credit Report?

While you may have access to your credit score through your bank, that is not the same as having full access to your credit report. To do so, you should visit AnnualCreditReport.com, where you can access your full report for free once per year from each of the three major credit bureaus—Equifax, Experian, and TransUnion. Because you can access each one annually, you can time it so you can review one of the three reports every four months at no cost.

Does Checking My Credit Score Hurt My Credit?

Checking your credit score or your credit report does not impact your credit score. However, your score will be impacted if a lender does what is called a hard pull when checking your credit. This happens when you are applying for a loan or a credit card, and it is normal, but too many hard pulls in a short period of time are viewed negatively by the credit bureaus.

The Bottom Line

Even though there is no “official” minimum credit score, it will be easier to obtain 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 containing all three agencies’ scores. If all three credit scores are usable, the middle score is the “representative” score or the one used. If only two scores are usable, the lower one is used.

You can get preliminary information on where you stand for free. Each year, you are entitled to one free credit report from each of the big three credit agencies. Getting a free credit score is more difficult, but you can get your credit score from a bank, some of which are increasingly making them available, or from websites that offer truly free credit scores.

Read the original article on Investopedia.