Mortgage Q&A Friday: “What credit score do I need to get a mortgage?”
If you’re thinking about purchasing a new home or refinancing your existing mortgage, you should know that your credit score is hugely important.
Lower Credit Score = Higher Mortgage Rate
Put simply, a lower credit score will lead to a higher mortgage rate, and vice versa. This all has to do with risk. The lower your credit score, the higher the chance you’ll default on your mortgage, at least that’s what the statistics say.
So if your credit score is too low, you probably won’t even get approved for a mortgage (how to get a mortgage with a low credit score). Lenders simply won’t want your business. It’s just that risky.
But assuming you are approved with sub-par credit, why accept an inflated interest rate and a much higher monthly mortgage payment? You’d be throwing money out the window.
Lately, banks and lenders have become even more stringent, requiring higher credit scores than they have in the past.
FHA Minimum Credit Score
For example, there is now a minimum credit score of 500 on FHA loans. In the past, there was no minimum whatsoever, which is hindsight sounds like a horrible mistake.
Now, a 500 credit score is pretty dismal, but many individual banks require higher-than-minimum credit scores for FHA financing that better suit their own risk appetite, such as a 600 credit score. So the minimum score is a bit deceiving, and your odds of getting approved with a 500 credit score are pretty slim.
However, Wells Fargo, now the nation’s top mortgage lender, recently lowered its credit score requirement on FHA loans after some public pressure.
But keep in mind that if you want to qualify for the FHA’s flagship 3.5% down loan program, you need at least a 580 credit score, otherwise you’ll be stuck putting at least 10 percent down.
Below 620 Credit Score Considered Subprime
As far as conventional mortgage loans go, a credit score below 620 is typically considered subprime, meaning you’ll have a difficult time qualifying for a mortgage, and if you do, you’ll receive a subprime mortgage rate. By subprime, I mean higher.
In general, you want a credit score above 720 to avoid any negative pricing adjustments, but a 760 credit score might be the new rule if you want the best possible terms and lowest rates.
If you’ve got excellent credit, you can even get a reduced mortgage rate, so it’s always recommended to strive for the best.
And though credit scoring is just one of the many criteria used to judge your borrowing capacity, it impacts how much you can borrow, your max loan-to-value ratio, and what you can do (cash-out refinance vs rate and term refinance).
Know Your Credit Scores Long Before Applying for a Mortgage
So if you’re in the market to get a mortgage, it’s good practice to view your credit scores long before you apply. I’m talking several months in advance because any necessary credit score changes/improvements take time. For example, any mistakes (or legitimate issues) holding your credit score down may take months to get cleared up. And you won’t want to leave anything to chance.
Also, be sure to go with a service that allows you to see all 3 credit scores, as mortgage lenders typically pull a tri-merge credit report, which includes credit scores from all three bureaus.
They then take the mid-score, so it’s imperative that all 3 credit scores are in tip-top shape. The credit reporting bureaus each report different information, so knowing just one won’t do you much good.
For example, if your credit scores are 720, 680, and 650, a mortgage lender would take the 680 score, which is a below-average credit score.
In summary, your credit score is probably the one thing you have complete control of, whereas things like job, income, and assets can be at the mercy of external forces. So do your best to strive for perfection in order to get the best deal on your mortgage.