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You don’t have a separate rating called a mortgage credit score, but lenders do look at your score, credit history and several other factors when deciding whether to approve you for a home loan. Contrary to what some people think, though, you don’t necessarily need an excellent or good credit score to get a home loan. How high your score is depends on your current financial situation, down payment and other factors.
The short answer is that it depends. Mortgage lenders will do a hard inquiry on your credit to see the score and the details behind it. Your credit score is typically a good first impression on how risky of an investment you are. Mortgage lenders don’t want to be left holding the keys to your home if you don’t or can’t make regular monthly payments, or if you make late payments, on your home loan.
Factors that can impact whether your credit score is high enough to be approved for a mortgage include:
FHA mortgage loans may be among the easiest loans to get in terms of credit score requirements. Individuals who qualify as first-time home buyers under FHA (Federal Housing Administration) backed lending programs may be able to qualify for mortgage approval with a credit score as low as 580 and a low down payment of only 3.5%. In cases where buyers can put forward 10% or more for a down payment, some lenders may approve individuals with FICO scores as low as 500.
For more conventional loans—those that meet the underwriting standards put forth by Freddie Mac or Fannie Mac—approval usually requires a good credit score. At minimum, these types of loans usually require a FICO score of around 620, but that assumes other factors are in your favor. A lower down payment or higher credit utilization, among other things, could mean you need a higher credit score to secure mortgage approval.
The answer is probably 620 or higher. You do want to minimize any surprises during the mortgage application and home buying process. Take the following steps to avoid this risk.
You may be able to qualify for an FHA or nontraditional home loan with a low credit score. Your chances of doing so are higher if you can tie your low score to a single issue and you otherwise have a strong credit history. You can also increase your chances by lowering your credit utilization rate, having a low debt-to-income ratio and saving up to put a large percent down when you buy the home.
Ask yourself this important question: Are you so preoccupied with whether you can get approved for a mortgage with your current credit score that you forgot to ask yourself whether you should?
Your credit score impacts more than whether or not a lender approves you for a home loan. It also impacts your loan and term options, which can impact the overall cost of the home. One of the most important parts of the mortgage that may be tied directly to your credit score is the interest rate.
A good or bad credit score can mean a shift up or down for your mortgage interest rate. And even a fraction of a percent in either direction can drastically change how much you pay for your home. Consider the examples below, which are applied to a $200,000 home loan for a term of 30 years.
Just a difference of 1% can result in savings (or losses) of more than $40,000 over the life of your mortgage. Use Credit.com to check credit score and credit report card to make sure your credit score is as high as possible before you start the mortgage application process.
December 13, 2023
Mortgages