Your credit score, the number that lenders use to estimate the risk of the credit or lending you money, is an important factor in determining whether you’ll be accepted for a mortgage. The score is not a fixed number but fluctuates periodically in response to changes in your credit activity (for instance, if you open a new credit card account). What number is good, and how do scores influence the interest rate you’re provided? Here’s helpful information from The Pyramid Group with Keller Williams. Keep reading to find out.
The common credit score is known as the FICO score, and it was made by Fair Isaac Corporation. It uses the following data from your credit report:
- Your payment history (which represents 35 percent of the score)
- Amounts you owe (30 percent)
- Length of the credit history (15 percent)
- Types of credit you use (10 percent)
- New credit (10 percent)
- Minimum Credit Scores
There is no minimum credit score officially because lenders can consider some other factors when they are determining if you qualify for a mortgage. You may be approved for a mortgage with a lower credit score if, for instance, you have a solid down payment or your debt load is otherwise lower. Since several lenders view your credit score as one piece of the puzzle, a lower score will not prevent you from getting a mortgage.
What Lenders Like to See
Since there are many credit scores (all based on a different scoring system) available to lenders, be sure you know which score your lender is utilizing so you can compare apples to apples. A score of 850 is the high FICO score you can get. Every lender has its own strategy, so while one lender can approve your mortgage, another cannot when both are using a similar credit score.
Although there are no industry-wide standards for credit scores, the following scale from personal finance education website www.credit.org serves as a primary point for FICO scores and what every range means to get a mortgage:
- 740 to 850: best credit – Borrowers get easy credit approvals and good interest rates.
- 670 to 740: better credit – Borrowers are offered and approved better interest rates.
- 620 to 670: Acceptable credit – Borrowers are approved at high-interest rates.
- 580 to 620: Subprime credit – It is possible for borrowers to obtain a mortgage, but not guaranteed. Terms will likely be unfavorable.
- 300 to 580: Poor credit – There’s little chance of getting a mortgage. Borrowers will take steps to improve credit score before it will get approved.
The best mortgages with low credit
If you have a lower credit score, or past red marks on your credit report, the 1st type of mortgage you need to look at is an FHA loan.
These are insured by the Federal Housing Administration (FHA). This insurance protects mortgage lenders, making it possible for them to lend to borrowers with low credit scores and small down payments. Actually, the Federal Housing Administration mortgage program was exactly designed for credit-challenged home buyers. It lets the low credit score of any loan program 500 although you require a 10 percent down payment if your score is below 580. Those with a score above 580 need to put 3.5 percent down.
Conventional loans let a modest credit score of 620 with a down payment of 3 percent. However, the price of private mortgage insurance (PMI) can make conventional loans unattractive for low-credit borrowers with less than 20 percent down. Conventional and Federal Housing Administration (FHA) loans both need mortgage insurance. The difference is that FHA charges the same mortgage insurance premiums for all borrowers, irrespective of credit. Conventional mortgages, on the other hand, have steeply increased PMI rates for borrowers with lower credit and a low-down payment. As a result, FHA financing can sometimes be cheap for borrowers with credit in the low- to mid-600s.
For veterans as well as active-duty service members, a VA mortgage is a great bet. VA mortgages are backed by the federal government (by the Department of Veterans Affairs). They benefit from ultra-lower mortgage rates, and unlike Federal Housing Administration (FHA) loans, borrowers do not have to pay for mortgage insurance to get financing. There is technically no minimum credit score for a VA loan. Several lenders set the bar at 620, but determined shoppers can probably find VA lenders that let credit scores beginning at 580.