There’s no doubt about it, your credit score will impact your ability to qualify for the lowest interest mortgage — and if your score is particularly low, it could prevent you from qualifying for a mortgage altogether.
There’s a lot of mystery around credit scores, how they are calculated, and what they can mean for a prospective home shopper. Read on to cut through the confusion.
In The End, The Banks Decide
First, you should understand that there is no singular credit score that defines you. That means that the credit score you get from an online site that provides free credit reports to consumers once a year, is probably not the FICO score your lender is using to determine what type of loan they will ultimately offer.
Indeed, most people have dozens of credit scores and the one that gets used depends on which reporting agency your lender pulls from and which type of score it requests.
Get A Copy Of Your Report
That doesn’t mean you shouldn’t request one before you set off on the home buying process—you should!—but it does mean that you won’t know exactly which score the mortgage underwriter will use to determine your ability to qualify for a loan.
Generally speaking, credit scores are a rating of your credit, which includes things like your payment history (aka do you pay your debts on time?), how much debt you have, how long you’ve been using credit, what types of credit you have (credit cards, retail accounts, other mortgage loans, etc.) and your newest credit.
A loan underwriter will also take into account your income, amount of money in reserve, your employment history, etc. Essentially the bank needs to feel confident that you can and will repay your loan every month on time.
Credit Scores Explained
A credit score of around 650 (some say 620) is usually recognized as “good enough” to qualify for a conventional mortgage loan. Keep in mind, though, that a bank may want a customer with a credit score in the low 600s to put down a larger down payment or they may decide to offer a higher percentage rate mortgage than they would to someone with a better credit score. Customers with an especially low credit score may want to consider an FHA loan, whose bottom is 580.
A credit score of 740 or above is considered quite good and those consumers will generally qualify for the best mortgage loans at the lowest interest rates. Lenders, of course, will also be looking for a low debt-to-income ratio, and they prefer a customer that has a variety of credit utilization, say a car payment and a couple of credit cards.
Get Started Early
It’s recommended that you check your credit report and score about a year before you plan to start looking to purchase a house. That way, if there are any errors, you can get them corrected, and if your score is low, you can work to bring it up.
To bring your credit score up, you shouldn’t open a bunch of new accounts in hopes those will erase any bad ones you have—that tends to lower your score. And for your credit cards, make sure you continue pay on time and use no more than 30 percent of your available credit (10 percent is ideal). That might mean requesting an increase in credit limit.
You can also contact any lenders where you were late on payments and see if they are willing to take your tardiness off the report or agree to remove your lack of payment if you pay the remaining debt off in one lump sum.