Remember one thing when buying a home: A high credit score makes a big financial difference. Since your score represents your trustworthiness to lenders, you're likely to get a good deal on a loan the better it is — and that means paying less money for your mortgage.
Credit scores range from 300 to 850 and are often crucial to the homebuying process. Your FICO score determines which type of mortgage loan you're eligible for, or whether you qualify at all.
"Healthy credit is essential in this current lending environment, as Covid-19 has made it an especially important factor," says Andy Taylor, general manager of Home & New Ventures at Credit Karma. Borrowers with lower scores may have a more difficult time finding a loan, and if they do, it will likely come with higher interest rates.
"Stricter lending terms will not be in place forever," he says, "but if you're looking to purchase a home now, it's important to be aware."
To get the best interest rate on a mortgage loan, borrowers should have a credit score of 760 or greater, which is considered "good" on FICO's scale. But the minimum requirement varies depending on the loan type. Although some loans accept "poor" scores as low as 500, the baseline needed for most is 620.
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Here are the minimum score requirements for five mortgage loans, based on FICO data.
- Jumbo loan: Most lenders prefer at least a 680
A jumbo loan exceeds the maximum loan limit set by the Federal Housing Finance Agency. It's used for properties that are too expensive for conventional loans. Jumbo loans are not guaranteed by a government agency, like the U.S. Department of Veteran Affairs, or by the government-sponsored Fannie Mae or Freddie Mac.
These loans can be secured through a private lender, but lenders consider them risky since they aren't federally backed, meaning the financier isn't protected if the borrower defaults. The required down payment varies.
- USDA loan: Most lenders prefer at least a 640
The U.S. Department of Agriculture insures for low- to moderate-income homebuyers. The USDA does not set a minimum credit score requirement and does not require a down payment.
- Conventional loan: 620
Conventional loans aren't insured by a government agency either, but they are covered by mortgage loan companies Fannie Mae and Freddie Mac. The down payment amount varies.
- VA loan: Most lenders prefer at least a 620
A Veterans Affairs loan is backed by the U.S. Department of Veterans Affairs and meant for military members and their spouses. These loans don't require a minimum score or money down.
- FHA loan: 500 (with 10% down payment) or 580 (with 3.5% down payment)
FHA loans, those guaranteed by the Federal Housing Administration, are for higher-risk borrowers who have poor credit and little money saved for a down payment. The credit requirements can fluctuate based on how much of a down payment you can afford.
Americans' credit scores jumped in 2020. The average FICO score reached 710, Experian's 2020 Consumer Credit Review highlights. But there is still room for improvement.
While a 710 score is "good," anything between 740 and 799 is "very good," and an 800 or above is "excellent." While a good score isn't bad considering the economic woes brought on by the pandemic, an excellent score would be even better.
Say you want to borrow $200,000 to buy a home, just below the U.S. median, and you apply for a 30-year fixed-rate loan. Your credit score is 760 and you get a 3% rate. Excluding insurance and taxes, that payment would be around $772 a month, and you'd pay $78,053 in interest over the loan's lifetime, according to FICO's loan savings calculator.
If your score were 660, in "fair" territory, that monthly payment would be $837, another $65 a month, and a total of $101,230 in interest.
The difference in interest: $23,177.
Keep in mind that houses are selling fast and mortgages are still at pandemic lows. The average contract interest rate on 30-year fixed-rate mortgages was 2.92% earlier this month.
"Anyone shopping for a mortgage, regardless of their credit score, should compare rates and terms from different lenders," Taylor says. "You wouldn't buy a pair of shoes online without first shopping around for the best price, but consumers often make the biggest financial decisions of their lives by going with the very first person who calls them back."
If you have bad credit, or no credit, you probably can't get a mortgage without a co-signer. You can take steps to improve your score with some simple strategies, though, experts say.
"If your credit score is low due to high card balances, then the best way to quickly improve the score is to pay down those balances until they're less than 35% of your credit limit," says Melissa Cohn, executive mortgage banker at William Raveis Mortgage. "If your score is low due to a late payment, or you have an account in collections, then the only way to improve it would be to get in touch with the company that reported it, and ask that they remove it."
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Pay your balance in full and on time. Payment history makes up 35% of your FICO score, and missed payments can stay on your credit report for years. Look out for your credit utilization rate, too, which is the ratio of how much you've spent on your credit card versus the card's limit.
The ideal rate is less than 30% of your available credit.
Don't close old cards since the length of your credit history is a factor in your score. Don't open multiple cards at once to avoid too many hard inquires on your report. And remember to check your score. Most institutions let you do it for free, and it's a good way to stay informed.
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