If you’re just starting the homebuying process, you’ve probably read stories about just how much your credit score can influence your ability to get a mortgage. While it’s true that you need a good credit score for the strongest interest rates and loan terms, less-than-perfect credit doesn’t have to be a roadblock to your dream of homeownership.
By knowing the ins and outs of how your score can affect your mortgage rate, you can build and improve your credit before closing on your new home.
How your credit score affects your mortgage rate
Your credit score is among the more important factors a lender considers before deciding whether to approve you for a mortgage. But they also consider your debt-to-income ratio, your savings and how much money you have available to put toward a down payment.
Beyond helping to determine whether you can even get a mortgage, your score also plays a large role in the interest rate and payment terms you’re ultimately approved for. If your credit score is below average — which experts say is anywhere from 650 to 699 — lenders may factor in risk-based pricing when quoting your mortgage details.
To offset the perceived risk of taking on a borrower with a low credit score, a lender may increase the interest rate on a mortgage. It means that a credit score of 650 might get a higher interest rate than a credit score of 720, which could cost you tens of thousands more over the life of your mortgage.
What credit score do I need to buy a house?
There’s no concrete answer, but experts say that with a score of 660 can help you qualify for a home loan. Scores of 660 or lower might mean ending up with a high interest rate and poor loan terms.
To qualify for an FHA loan, which often requires only 3.5% of your purchase amount as a down payment, you’ll need a minimum credit score of 580. However, because many lenders use underwriters that assume the financial risk, you may be able to get around the minimum if the underwriter agrees to an exception if you carry minimal debt or can prove substantial savings.
Right now, the average American’s credit score is 695, which is relatively high. For top-notch rates, aim to improve your credit score to around 740 before applying for a mortgage.
- Most conventional mortgages require a credit score of 620 or higher.
- Loans backed by the Federal Housing Administration require a minimum score of 500 to qualify for a 10% down payment and a minimum 580 for 3.5% down payment.
- USDA loans require a credit score of 640 or higher
- Veteran Affairs loans require no minimum credit score.
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What’s the lowest score I can have without affecting my eligibility for a mortgage?
Unless you’re a veteran who qualifies for a home loan from Veterans Affairs, you’ll need credit score of at least 500. You’ll need to meet that same minimum to qualify for a 10% down payment for a loan through the Federal Housing Administration.
If you don’t meet those requirements, getting a parent, spouse or someone else with better credit to cosign for your loan could improve your chances of approval for a traditional mortgage. Otherwise, you may need to work on improving your credit before applying for a mortgage.
What credit score do mortgage lenders look at?
About 90% of lenders use your FICO Score, the most widely used among other credit scores. But different versions of FICO Score are used for different types of loans.
When applying for a mortgage loan, your lender will likely pull these three scores:
- FICO Score 5 based on Equifax data
- FICO Score 2 based on Experian data
- FICO Score 4 based on TransUnion data
What interest rate can I expect with my credit score?
Credit scores are broken down into categories that can help you gauge the quality of your creditworthiness and how far you must go to improve it:
- Poor — 300 to 579. Unless you have a cosigner or an underwriter is willing to make an exception, it’s not likely you’ll find mortgage approval with a poor credit score. If you do find a lender willing to take you on, expect a high interest rate on your loan.
- Fair — 580 to 669. You should be able to qualify for a loan with a fair score, but your interest rates will likely be high — sometimes significantly more so than with a good or very good score.
- Good — 670 to 739. Your credit score may affect your interest rate, but often not by much. You should see rates within 0.25% to 0.5% of the lowest available.
- Very good — 740 and higher. Your credit score will likely help you get the lowest interest rates and the best payment terms the market allows.
Should I check your credit report and score before looking for houses?
Yes. A general idea of your credit score can simplify searching for and ultimately buying a home.
With your credit report and score in hand, you can:
- Correct any inaccurate information or errors in your report before you apply.
- Anticipate your likelihood of approval as well as your interest rate.
- See where you can improve your overall creditworthiness before buying.
How to improve your score before applying for a mortgage
If your credit isn’t where you’d like it to see it for the lowest interest rates and best terms, you have a few tactics to improve it before you apply for a mortgage:
- Monitor your credit report. Keeping a close eye on your credit helps you more easily and quickly spot errors and gauge whether you’re heading in the right direction.
- Save up for a large down payment. If your credit score is less than perfect, putting more money down can trim your loan amount, ultimately saving you unnecessary interest.
- Hold off on other credit. Each time a potential lender runs your credit report, your credit score dips. Wait until your mortgage is approved before applying for your next credit card or loan.
- Lower your credit utilization ratio. Pay off as much debt as you can to lower your debt-to-income ratio and ultimately improve your score.
- Pay your bills on time. To assure future creditors that you’ll repay what you borrow, build a history of on-time payments.
- Hire a credit repair service. If you’re feeling stuck, call in professionals to get back on your feet.
Start your credit repair journey with these services
Your credit score plays a key role in a lender’s decision to approve you for a mortgage loan. Before you submit your next mortgage application, know your credit score and working on ways to improve it for the strongest interest rates and repayment terms you’re eligible for.
Frequently asked questions
Who can use FHA mortgages?
First-time and experienced homebuyers can take advantage of an FHA loan’s 3.5% down payment option and lenient loan requirements. The only stipulation is that cannot carry more than one FHA loan at any time.
How do student loans affect your credit score?
Student loans affect your credit score, but indirectly. Open student loans shouldn’t affect your credit rating, because they’re typically treated as installment plans. But missing or late payments on those loans can hurt your credit score.
How long does it take bad credit to clear from your report?
Seven years, in most cases. Negative items tend to fall away from your credit report after seven years. But it doesn’t mean your debt disappears — you’ll still owe what you borrowed.
How fast can I increase my credit score?
Expect at least three months for changes to show up on your report. However, many credit score improvements take longer to reflect on your report.
One of the speediest ways to boost your score is to ask a trusted loved one to add you as an authorized user on their account.