Credit Score: How it Affects Your Mortgage Eligibility
Credit can be a difficult topic for even the most financially savvy consumers. Most people understand that good credit history can improve your chances of qualifying for a loan because it shows the lender you’re likely to repay it.
However, understanding the meaning of your score, how it’s calculated, how it can influence your mortgage eligibility – and the interest rates you pay – is not as easy as it sounds. Below, we break down all of these topics.
Explaining Your Credit Score
The FICO credit score (created by the Fair Isaac Corporation) is one of the most common scores used by lenders to determine your creditworthiness. It is a component of pricing for the interest rates and fees you’ll pay to get your mortgage.
While exact scoring models may vary by lender, some variation of the standard FICO score is often used as a base. FICO takes different variables on your credit report, such as those listed below, from the three major credit bureaus (Equifax, Experian and TransUnion) to compile your score. Those range from 300 – 850. From this information, they compile a score based on the following factors:
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New credit (10%)
Payment History
Roughly 35% of your credit score is based on your history of timely payments on your debt. If you’ve made your payments on time and in full in the past, there’s a good chance you’ll do the same in the future, so your credit score may be higher. If you’ve had tax liens, late payments, lawsuits or bankruptcies, they can result in a lower credit score.
Amount Owed
Roughly 30% of your score is based on the amount of money you owe. Higher balances tend to lower your credit score, while lower balances can positively impact it.
Length of Credit History
About 15% of your score is calculated on the length of your credit history. Typically, the longer you’ve had open credit accounts, the higher your score can be.
Lacking credit history may not hurt you when it comes to FHA and VA loans, but good credit history is essential when applying for a conventional loan.
Types of Credit
Types of credit determine about 10% of your credit score. This refers to the variety of types on your report, including revolving debt like credit cards and retailer cards as well as installment debt like student loans, auto loans or mortgages. Having a mix of installment and revolving debt can help prove you can handle different types of payments.
New Credit
About 10% of your score is determined by new lines of credit. Opening multiple lines of new credit too quickly can negatively impact your credit score, as it may look like you’re desperate for credit. Asking for multiple lines of credit and receiving multiple credit inquiries from several lenders also has the potential to hurt your score, even if you don’t end up opening new accounts.
What is the Average Credit Score in the U.S.?
So how does your credit score stack up against others? The average credit score in the United States has been around 690-695 from 2016-2019, according to Experian’s annual State of Credit reports.
What Credit Score is Needed to Buy a House?
You may be wondering what credit score you need to buy a house. Unfortunately, you may not find an exact answer. There are several factors that go into qualifying for a mortgage besides your credit score. This includes the type of loan you’re applying for as well as your income and debt levels. Because of this, there isn’t an exact number you need to qualify. Some guidelines, however, are listed below:
- Conventional Mortgage: 620-640. 720+ to get the lowest rates.
- FHA Mortgage: 580-600. 640+ to get the lowest rates.
- Veteran Affairs (VA) Mortgage: While the VA does not have a minimum credit score requirement, Carlson Mortgage requires a 600 credit score on all VA loans.
It’s not only the minimums that matter. A higher credit score will generally qualify you for a lower rate on your mortgage, saving you money.
Conventional Mortgages
Conventional mortgages are home loans that follow the standards set by Fannie Mae and Freddie Mac. They’re uninsured by the government and known for lower down payments and good interest rates. These are typically best for those with good or excellent credit, as these loans require a higher credit score than an FHA loan.
These loans tend to offer the most competitive interest rates and flexible repayment periods, such as 15- and 30-year mortgage terms. While you may pay more money up front, you can save more money over the course of a conventional loan than you would with an FHA loan.
Minimum Credit Score for Conventional Loans
At Carlson Mortgage, your credit score for a conventional loan must be 620 or higher. Various lenders have different requirements and may require a different score.
FHA Loans
Backed by the Federal Housing Administration, FHA loans are insured by the government, making them easier to qualify for than conventional loans. They offer down payments as low as 3.5% and low-equity refinances, which allow you to refinance up to 97.75% of your home’s value.
FHA loans can benefit borrowers with lower credit scores or those who spend a significant portion of their income on housing. Current homeowners who are underwater on their mortgage – and could lower their monthly payment by refinancing – may also benefit from an FHA loan.
Minimum Credit Score for FHA Loans
The minimum FICO score for an FHA loan through Carlson Mortgage is 580, with a 3.5% minimum down payment. Other lenders may have different requirements.
For a standard FHA loan, a minimum of one credit score is required to qualify. If your lender obtains all three of your credit scores, they’ll use the middle score for consideration. If you apply for a mortgage with your spouse, lenders will use the lower of the two middle credit scores.
Better Credit Scores Lead to Greater Odds of Getting Approved
It’s important to know your credit score and understand what impacts it before you begin the mortgage process. Once you understand this information, you can begin to positively impact your credit score or maintain it so you can give yourself the best chance of qualifying for a mortgage.
It is possible to qualify for a mortgage with a relatively lower credit score but with high income and low levels of debt. It’s also possible to be turned down for a mortgage if your score is relatively higher, but you have high levels of debt and a lower income. Credit score requirements should be used as a guideline, as debt levels, income and down payments will also be taken into consideration when determining your mortgage eligibility.
Posted by: Carlson Mortgage – a top-rated St. Louis mortgage broker providing home loans in the state of Missouri. We are routinely ranked as a #1 mortgage broker in Missouri on Yelp, Google and Zillow. We can be reached at (314) 329-7314 seven days a week.
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