Your credit score plays a major role in the mortgage approval process; it dictates what types of loans you’re eligible for, how much money you’re expected to put down at closing, your interest rates and your mortgage insurance rates. That’s why, before shopping for the home of your dreams, it’s important to make sure your credit score is in good shape.
What’s the Big Deal About Credit Scores?
At some point during the mortgage approval process, the lender will assign an underwriter to review your financial history, your debt-to-income ratio and your credit score, among other factors. The lender uses this information to determine how likely you are to repay your loan on time. A higher credit score indicates that you have multiple lines of credit open and have consistently made monthly payments on all of them, which demonstrates personal responsibility and that you possess the necessary capital to pay off your loan.
In addition to making you a more attractive candidate for a mortgage, a high credit score comes with benefits such as lower mortgage rates, and, ultimately, lower monthly mortgage payments.
What is Considered a ‘Good’ Credit Score?
Based on the Fair Isaac Corporation (FICO) model — the standard used by most lenders — credit scores range from 300 up to 850. Generally speaking, when it comes to applying for a mortgage, the higher your credit score, the better. Most loans require a credit score of 580 or higher to qualify, though certain loan types are more lenient toward lower credit scores (more on that later). A credit score between 620 and 739 puts you in reasonable territory, while a credit score between 740 and 850 is considered top tier.
This top tier is where the rule “the higher, the better” goes out the window. From a lender’s perspective, there’s effectively no difference between a home buyer with a credit score of 740 and one with a score of, say, 800 — both are eligible for the same benefits, including lower mortgage rates. No matter what type or size of loan you see, there is no variance between a 740 credit mortgage score, an 800 credit score mortgage rate and an 850 credit score mortgage rate.
The one exception to this is private mortgage insurance (PMI). Lenders typically require PMI from home buyers who have paid less than 20% down. How much you pay in PMI depends on a number of factors, including how much you put down at closing, the terms of your mortgage and your financial status; this last item refers specifically to your credit score. In the world of PMI, an ideal credit rating is 760 and, if you fall into this category, you’re guaranteed the lowest possible PMI rates for your specific circumstances. This difference in PMI rate is effectively the only variance between a 740 credit score mortgage and an 800 credit score mortgage.
Can I Still Get a Loan with a Low Credit Score?
As mentioned above, most loans require a credit score of 580 or higher, though a few loan types — specifically government loans — are more lenient. Loans backed by the U.S. Department of Agriculture require a credit score of 640 or higher. Department of Veterans Affairs loans don’t require a minimum credit score, though a score of 620 or higher is preferable. Federal Housing Administration loans are typically reserved for home buyers with a credit score between 580 and 700, however, individuals with a low credit score (as low as 500), non-traditional credit history or no credit history at all may also qualify.
Keep in mind that lenders evaluate low credit score mortgages on a case-by-case basis and that if you apply for a home loan with a low credit score, you’ll likely have to pay higher interest rates and make higher overall monthly payments. If you have a low credit score and have your heart set on home ownership, it’s in your best interest to focus on raising your score before applying for a mortgage.
How Can I Raise My Credit Score?
There are a few ways you can help improve your credit score. First and foremost, focus on making your monthly payments on time to avoid derogatory marks and collections. Be sure to utilize your credit wisely — you should never have a credit card balance that is more than 30% of your available credit and if you can maintain a balance of 20%, so much the better.
The key to maintaining a low balance is to make small purchases, ideally on items you’re going to buy anyway (e.g. food, gas, etc.), and pay them off consistently. Keep credit lines open and active. Contrary to what you might believe, the more lines you have open, the better, so long as you make payments on time. If you have trouble opening new lines of credit, consider applying for a secure credit card. If you have any derogatory items or past due accounts, call your creditors and square up on bad debt as soon as possible.
At Blue Water Mortgage Corporation, we understand just how important good credit is for mortgages. Our team of experienced mortgage brokers has the knowledge and expertise necessary not only to guide you through every stage of the mortgage application, but also to secure the most competitive mortgage rates and monthly payments. If you have any additional questions about how to improve your credit score, we’re connected to a vast network of credit repair professionals who can help get you on track. Contact us today to discuss how we can help you get the ideal terms on your monthly home mortgage payment or to try out our credit analysis tool.