Mortgages: What to Expect With Your Credit Score

by Robert SummersJanuary 5, 2016

There’s No Time Like the Present for Improving Your Credit Score

If you’re considering purchasing a home, then you know that your credit score is a crucial piece of the puzzle. It’s one of the most important metrics lenders use to evaluate your viability as a borrower, and to determine how much interest they’ll need to charge to make taking the risk of offering you a mortgage worthwhile.

If you haven’t yet applied for a mortgage, then you may be wondering how your credit score will stack up in the eyes of potential lenders. Will they offer you a great interest rate, or will they tell you to come back when you have your financial ducks in a row?

In this guide, we’ll clue you in on the reaction you can expect from lenders when you apply for a mortgage with your credit score.

First Things First

If you’re planning on purchasing a new home in the not-too-distant future, then checking your credit score should be one of the first items on your agenda.

Once a year, you can obtain a free credit report from each of the consumer bureaus by visiting annualcreditreport.com. Don’t be fooled by lookalike websites, as many of them are dubious, at best.

You may also have credit cards that offer free credit monitoring services. If so, take advantage of their offerings. Monitoring services are preferable to one-time credit reports because they keep you up-to-date on any new developments that affect your credit rating.

If your credit card issuers do not offer credit monitoring, then you may want to opt for one of the many affordable credit monitoring services available online.

Also, you should know that now is not the time to apply for new credit cards, lines of credit, or loans, unless a credit advisor tells you to do so. Applying for new credit can affect your credit rating, and given the fact that a small change in interest rate can cost many thousands of dollars over the life of a mortgage, you don’t want to risk losing any points, if you can avoid it.

500 or Less

If your credit score is under 500, well, let’s just say you have your work cut out for you. Even the U.S. Department of Housing and Urban Development requires a score of at least 500 (and a down payment of 10% or more) to qualify for an FHA loan. See a credit counselor or do some research on your own, and start doing what you can to repair your credit now. By the time you’re ready to buy, you should be able to give your credit rating a respectable boost.

500 – 600

Okay, so your credit isn’t the best, but that doesn’t put you out of the home-buying game entirely. At the lower end of this spectrum, your best bet will probably be an FHA loan. These federally backed mortgage products are open to all borrowers who meet the minimum eligibility requirements, and not just for first-time homebuyers, contrary to popular belief.

If your credit score is below 580, then you’ll need to have at least 10% of the purchase price to use as a down payment, and you’ll have a more difficult time qualifying. Raise your score above 580, and you’ll qualify for the FHA’s very attractive 3.5% down payment option.

600 – 700

In the low six hundreds, you’re still not what lenders would call a “prime borrower,” but you’ve got some options. Along with the aforementioned FHA loan program, you may be eligible for loan mortgage programs designed for low-credit borrowers. However, you should expect to pay anywhere from 1-3.5% extra for the privilege of borrowing.

Once your credit score is above 660, congratulations! You now have “fair” credit, which sounds much better than “poor” or “bad.” At this level of the credit ladder, you’ll have access to a much wider array of mortgage products. You’ll be able to shop for mortgages using the standard online calculators, and your rates won’t be too much higher than what a prime borrower could expect to pay.

When it comes to mortgages, though, a few points make a big difference. If you can, keep working on your credit.

700 – 800

In this range, your credit rating is between “good” and “excellent.” Between 700 and 740, your rates should only be slightly higher than they would be if your rating were 800 or higher. Give yourself a pat on the back! All of your prudent financial habits are about to pay off.

800+

If your credit score is above 800, then you’re what lenders call a “highly qualified borrower.” Those ultra-low mortgage rates you see advertised? Those are for you. Keep up the good work!

You Have Options, Regardless of Credit

If you have perfect credit, then you should have little trouble qualifying for a mortgage. But even if your credit has seen better days, you may still qualify for a mortgage. Don’t let a blemished credit rating hold you back from achieving your dream of homeownership. Talk to a mortgage professional to see what you can do to put yourself closer to realizing that dream.

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Robert Summers
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