What is the Best Score for a Mortgage. Having a high credit score will ensure that you’ll be approved for a mortgage loan and receive a lower interest rate. The difference between a 3% and 3.5% rate will add up to thousands of dollars over the term of a mortgage loan.
We all want to get the best mortgage rate on our loan. You should know what your credit score is before applying for a mortgage loan so you can look for ways to increase it if necessary to get a more favorable rate. Let’s understand what role your credit score has on your rate and what it can do to repair credit.
Why Credit Scores Matter
Your credit score is instrumental in determining what your mortgage rate will be. Why is it so important? Think about it from your lender’s perspective. If you have a friend who always needs a loan and it takes them a long to pay them back, you probably won’t want to lend them money. Or worse yet, if they don’t you back at all.
Lenders look at people’s credit scores because part of what makes up its calculation is payment history. Someone who has a track record of repaying their loans on time is more likely to continue this behavior on a new loan. Since lenders look at a borrower’s credit score, the higher it is, the more assurance they have that they will be paid back.
There are other indicators that lenders look at when determining whether they will lend money to you and what interest rate to offer. This includes:
- Loan Type – Whether you are getting a loan that’s backed by the U.S. government (VA, FHA, and USDA loans) or a conventional loan.
- Fixed or adjustable-rate – You’ll pay the same interest rate over the life of the loan with a fixed rate. Adjustable rates may change based on market conditions and generally have a lower interest rate at first, though that could change later.
- Down payment – By putting more money you put down on your initial home purchase, you could secure a lower interest rate.
- Loan Term – 30-year mortgage loans are the most popular. But you can also find loan terms for 20, 15, and 10 years too. These loans have lower interest rates in return for higher monthly payments.
Which Credit Score Affects You the Most
Many consumers don’t realize that you actually have multiple credit scores. When your credit score is pulled for a mortgage loan, it isn’t necessarily the same as the one that’s pulled from a credit card company.
TransUnion, Equifax, and Experian are the three major credit bureaus that collect consumer credit information. All three calculate FICO credit scores, but because their data could be a little different, your score may vary. FICO has also updated its scoring methodology over time, which has resulted in more possible scoring models.
Government-sponsored loans through Fannie Mae and Freddie Mac use older versions of the FICO credit score. So if you’re using your credit score that’s offered through your credit card company or credit score service, they are almost certainly using a newer version.
You might consider purchasing your credit score from all three credit bureaus if you have a borderline score. A lender might pull your score from two bureaus and take the lower score or go with the middle if they pull all three. Otherwise, if you know which bureau your lender plans to pull from, you can just purchase your score from them.
Minimum Credit Score for Mortgage Loan Type
Having at least a credit score of 700 and above will typically get you the lowest interest rate. What a creditor considers an acceptable score will vary. Here are some guidelines that will give you a general idea:
- 740 or higher – Generally considered excellent credit.
- 700-739 – Generally considered good credit.
- 630 – 699 – Fair credit.
- 629 and below – Poor credit.
These loans arent’ backed by the government, but follow the standards set by Fannie Mae and Freddie Mac. You’ll need a minimum FICO score of 620. Conventional loans are best for those who have good or excellent credit.
The Federal Housing Administration backs FHA loans, mitigating some of the risks to lenders. This makes these loans easier to qualify than conventional loans. Although there is no minimum FICO score requirement by the government for these loans, lenders will set their own minimums.
You’ll typically need a 580 score and a 3.5% down payment to qualify for an FHA loan. If you have a score below this, that doesn’t necessarily mean you won’t qualify. As long as you can put a down payment of at least 10%, you may still qualify with some lenders.
Backed by the U.S. Department of Veterans Affairs, you must meet eligibility requirements to consider a VA loan. Generally, this means you must be a member or veteran of the U.S. Military, Reserves, or National Guard. Spouses of military members who were killed during active duty or a service-related disability are also eligible.
Like the Federal Housing Administration, the VA doesn’t set a minimum credit score requirement. Most lenders set theirs at 640. These loans are very popular with eligible borrowers because they don’t require a down payment.
Improving your Credit Score
If your credit score needs a little TLC. there are ways you can improve it. Just be aware that it could take time, especially if you have a lower score. Here are some ways to boost your credit score:
Fix Errors on Your Credit Report
You get a free copy of your credit report from all three bureaus for free each year. Visit AnnualCreditReport.com to order yours today. Look over each of these reports to spot any errors.
For example, if a bureau is reporting that you were late on your credit card six months ago. Contact the bureau (you may need to submit proof) and have them fix the error. In most cases, the bureau must correct these errors within 30 days.
Pay your Bills on Time
Sign up for auto-pay, set reminders, or whatever it takes to make sure you’re keeping current on your bills. This includes your rent, car loans, student loans, and credit cards.
Reduce your Credit Card Balances
Keep your credit utilization below 30 percent. This is the ratio of debt you have versus your available credit. For instance, if you have $6,000 debt on a total of $10,000 available credit, you have a credit utilization of 60%. Make a plan to pay down your balances faster. It will also save you money on interest charges.
Don’t Open New Lines of Credit
Even though opening new lines of credit will increase your credit utilization, it can slightly lower your score. Instead, wait until your credit score has improved to shop rates. Don’t spread out your inquires further than a 30-day window either because it will affect your score.
Don’t Close your Older Credit Lines
The longer you have a history of credit, the better. So even though you don’t use your first credit card from 15 years ago, it’s still an important part of your credit history. Plus, closing old, unused lines will also increase your credit utilization.