Intro: Credit Score for Mortgage Loans
If you are finally ready to take the plunge into purchasing your first home or simply want to buy a larger home than the one you currently own, there are a few things you need to know. You should be aware that your credit score for a mortgage needs to be high or at least a good credit score number.
The question is: What’s a good credit score to buy a house?
Why Credit Scores Needed to Buy a Home Are Important
Your credit score is a representation of your credit worthiness and your ability to pay your debts. Since most people require financing to purchase a home, your credit score becomes critically important in your ability to make a down payment and keep interest rates low. The average consumer has a credit score of 725. A credit score for a mortgage can vary depending on the lender and what credit bureau they go by. The score is a three-digit number.
Most credit reporting companies and lenders run a credit score range between 300 and 850, although some may go as high as 990. Having a high credit score, which is needed to buy a home, can keep you from paying thousands of dollars in interest rates over time.
According to Credit Karma, a credit report company, if your credit score for a mortgage is 650, and you purchase a home for $400,000, then you will pay an additional $70,000 in interest rates over 30 years. Someone with a credit score for a mortgage of 750 can avoid that overpayment and save $70,000.
Certain factors contribute to the rise and fall of your credit score:
- Late payments
- Amount of debt you still owe
- Length of your credit history
- Credit application frequency
- Types of credit
Image Source: Credit Score to Get a Mortgage
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What Kind of Credit Score Is Needed to Buy a House – Types of Credit Scores to Get a Mortgage
What kind of credit score you need to buy a house will depend on the lender you decide to use and the credit bureau(s) they use. Many lenders use the FICO score for mortgage loans. FICO uses your credit scores from the three big credit bureaus, Equifax, TransUnion, and Experian, to determine your credit worthiness. The credit score range for FICO is 300 to 850. This score can change over time as the credit bureaus are typically updated monthly.
According to Lending Tree, a lending network for prospective home buyers, the credit score needed to buy a home is based on a representative score or middle score to pinpoint your number. The three credit bureaus are used to find a middle score if you have reports on all three. If you only have scores from two of the credit bureaus, then the lower score is used for underwriting.
The following are a few common programs prospective homebuyers use when purchasing a home.
FHA – What Kind of Credit Score You Need to Buy a House
The minimum FICO score for a FHA loan (also known as a first-time home buyer’s loan through the Federal Housing Administration) is 580 with a 3.5 percent down payment. According to FHA, you can have a credit scoreless than 580 (but not below 500) and be approved with a down payment closer to 10 percent. Due to this low credit score for a mortgage, many people find FHA loans easier to qualify for in the long run, even if a larger down payment is required.
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Fannie Mae and Freddie Mac – Knowing What’s a Good Credit Score to Buy a House
Fannie Mae and Freddie Mac are two federal housing programs operating under a congressional charter to help stabilize the mortgage markets. Fannie Mae began using trended credit data in the fall of 2015 to predict whether a consumer would be a high risk for a mortgage loan. The three credit bureaus also use trended credit data to decipher your credit score for a mortgage.
The minimum credit score needed to buy a home with Fannie Mae is 620, and the minimum down payment is three percent. It is the same minimum credit score and down payment with Freddie Mac.
USDA Mortgage Loans – Good Credit Score Needed to Buy a House
The USDA Rural Development Guaranteed Housing Loan Program bases its mortgage loan decisions on property eligibility and your credit and financial eligibility. Since so much of the USDA’s decision is based on income, your credit score needed for a mortgage is less persuasive. You will need to prove your income and employment history to be considered a stable prospective home buyer.
The USDA does not have a minimum credit score. If your score is considered low, you may still qualify for the loan if you can show the lender you are making your payments on time and all late payments are at least 12 months ago. Any bankruptcies must have occurred at least two years ago and show consistent payments since that date.
VA – Credit Score Needed to Buy a Home
The Veteran’s Administration (VA) provides veterans with a guaranteed loan that provides a myriad of exclusive benefits:
- The loan is reusable
- No down payment is required unless the lender requires one, up to $417,000 in most of the U.S.
- No mortgage insurance is required
- The closing costs are limited
- Minimum property requirements to ensure the vet’s safety
- The one-time VA funding fee is included in the loan
- Disabled vets are exempt from paying the VA funding fee
- Access to a loan technician to avoid foreclosure
Veterans that qualify for the VA guaranteed loan do not have a minimum credit score for a mortgage; however, the VA does allow the lender to determine eligibility for the loan after assessing your overall report.
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Wells Fargo – The New Credit Score Needed for a Mortgage
The National Mortgage News reported that Wells Fargo raised its minimum credit score for FHA mortgage loans from 600 to 640 in the fall of 2015. The reason behind the increase is the high number of homeowners defaulting on loans. The higher the credit score, the lower the risk for the lending company.
As more banks increase their minimum credit scores to avoid foreclosing, banks like Wells Fargo, Bank of America, and Quicken Loans will need to carefully review a prospective home buyer’s profile before making the decision. FHA and other programs allow the lender to set the underwriting guidelines for the loans, including what kind of credit score is needed to buy a house.
The Relationship Between Credit Scores and Interest Rates
The relationship between your credit score and the interest rate you receive in your mortgage is linear because, as your credit score increases, your interest rate will decrease. This is one of the benefits of repairing your credit and consistently making payments. Of course, you should remember that there other variables besides your credit score for a mortgage that can derail your chances of getting a loan.
Image Source: Credit Score for Mortgage Loans
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Why You May Not Get Approved Even with a Good Credit Score for a Mortgage
There are other reasons why you may not be approved for a loan, even with a good credit score for a mortgage. According to RP Funding, a direct lending company, there are more than a dozen reasons you might be turned down:
- Not telling your lender about a past bankruptcy or foreclosure
- Additional expenses not counted as qualifying income
- Not disclosing income from a side business
- Seeking additional credit before the home buying process is complete
- Keeping a relationship between the seller and the buyer quiet
- Reporting large and undocumented deposits in your bank accounts
- A change in your employment situation
- Not telling your lender about land or homes you own
- Not reporting to your lender about properties you own through your LLC or through a private seller
Lenders will not continue the home buying process if your name appears in the CAIVRS (Credit Alert Verification Reporting System) database. The database is maintained by the U.S. Department of Housing and Urban Development, known as HUD. It reports any federal debt you may owe that currently is in default or in the foreclosure process. The lender provides your tax identification number or Social Security number to find any losses.
Even with all these reasons, if you are denied a mortgage, many times it is due to your credit score and the amount of delinquent payments or collections on your profile.
What You Can Do to Raise Your Credit Score for a Mortgage
The best option when considering purchasing a home is to raise your credit score before beginning the prequalification process. Since the three big credit bureaus – Experian, TransUnion, and Equifax – all report different scores, you will want to increase your credit score to hit a credit range instead of a specific number. Different lenders use varying ranges; however, the credit range scale below from Credit Karma gives you an idea of where to aim your credit score for a mortgage.
- 750 to 850 – Excellent
- 700 to 749 – Very Good
- 640 to 699 – Good
- 580 to 639 – Poor
- 300 to 579 – Very Poor
Quite a few lenders will work with you if your credit score is at least above 620. Wells Fargo will work with a credit score for a mortgage loan above 640. Consider speaking to a financial advisor about ways you can raise your credit score for a mortgage.
The following are a few ideas you can use to begin increasing your credit score from Realtor.com:
- Request a credit report that includes as many credit bureaus as you can. Sometimes, charges placed on your credit report are not your debt. It could be an error, or worse, a result of identity theft. Check your report on a regular basis and question any charges that look suspicious. Many times, a company will charge off a debt if they can’t prove it was yours or they do not respond to your request within a certain time period.
- Pay any outstanding debt, collections or judgments. Outstanding debt will hurt your credit score for a mortgage. Try to pay these off as quickly as possible and follow up with the companies to make sure they remove the collection from your report.
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- Confirm that your current debt is up-to-date. Lenders look at your ability to pay your bills on time and consistently. Bring any payments and credit card balances up to date and within limits.
- Reduce your credit card balance. Lenders prefer you only use about 25 percent of your credit card balance at any given time. You may want to consider paying above the minimum payment and working to lower all of your credit card balances.
- Consider using an old credit card and paying off quickly. Realtor.com recommends using an old credit card that hasn’t been used for a long time and paying the total balance quickly. Lenders may get a sense of your ability to pay off debt and manage credit.
When it comes to purchasing a home, knowing what is a good credit score to buy a house will help you tremendously with the prequalification process and lower interest rates in the long run. Stick to a credit score range and improve your credit score for a mortgage today.
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