Getting a mortgage to buy a house is one of the biggest financial decisions you’ll make. Your credit score plays a key role in determining whether you’ll qualify for a home loan and what interest rate you’ll pay. So what credit score do you need to get approved for a mortgage?
Factors That Determine Your Mortgage Interest Rate
Your credit score is one of the top factors lenders consider when deciding your mortgage terms, but it’s not the only one. Here are some other key influencing factors:
Your Debt-to-Income Ratio
Lenders want to see that your total monthly debt payments aren’t more than 36% of your gross monthly income. This includes your mortgage payment, credit card bills, student loans, car loans, and other debts. The lower your DTI, the better.
Your Down Payment Amount
The more money you put down, the less risk for the lender. Most conventional mortgages require a down payment of at least 3-5% of the purchase price. The minimum is typically higher for FHA, VA, and USDA loans.
Loan Type
Government-backed loans like FHA and VA mortgages have more flexible credit requirements than conventional loans. Loan programs for first-time homebuyers may also be more lenient.
Your Income and Employment
Lenders want to see stable income from consistent employment. Bonuses, overtime, and commissions often aren’t counted fully.
Minimum Credit Scores Needed for Different Mortgages
Here are the typical minimum credit scores required for popular mortgage programs:
- Conventional:Â 620
- FHA loans:Â 580
- VA loans:Â 620
- USDA loans:Â 640
- Jumbo loans:Â 700
So for most mortgages, a credit score of 620 or higher is considered good. But aiming for a score of 740 or higher can get you better interest rates saving you thousands over the loan’s term.
How High a Credit Score Do You Need for the Best Rates?
Here are the credit score tiers and the mortgage rates you can expect with each:
- 760-850:Â Excellent credit – Best rates offered
- 700-759:Â Good credit – Near the best rates
- 680-699:Â Fair credit – Slightly higher rates
- 620-679:Â Poor credit – Noticeably higher rates
- 580-619:Â Very poor credit – May not qualify for some loans
As you can see, a credit score above 700 will put you in prime mortgage territory. But even bumping up your credit score within a tier, say from 670 to 690, can mean a lower rate.
How Mortgage Lenders Check Your Credit
Mortgage lenders will examine your credit report from the three major credit bureaus – Equifax, Experian, and TransUnion. They typically use your middle score, so it pays to improve your credit across all three bureaus.
Some lenders may use a more in-depth residential mortgage credit report that shows more details than your standard reports.
Key factors lenders look for include:
- Payment history – Have you paid past debts on time? Late payments hurt.
- Credit utilization – How much of your available credit do you use? 30% or less is best.
- Credit history – Do you have a sufficient history of managing debt? Length of history and mix of accounts matter.
- New credit inquiries – Too many new applications in a short time can be seen negatively.
- Collections – Outstanding collections need to be paid off before closing.
- Bankruptcies – You may need to wait 1-4 years after filing to qualify for a mortgage.
How to Improve Your Credit Score for a Mortgage
It can take time to build an excellent credit score. But here are steps you can take to improve your odds of mortgage approval and get the lowest rate:
Pay Down Balances and Reduce Utilization
Carrying high balances on credit cards hurts. Try to get balances below 30% of limits on cards. Paying down installment loans helps too.
Dispute Any Errors on Your Reports
Fixing reporting mistakes can boost your score. Dispute errors with the credit bureaus.
Don’t Apply for New Credit Before Applying for a Mortgage
New credit inquiries can ding your score temporarily. Hold off on new credit cards or loans.
Pay All Bills on Time Going Forward
Payment history is your biggest factor. Pay everything on time.
Become an Authorized User on a Partner or Parent’s Card
Ask to be added as an authorized user on a credit card with good standing. It can give your score a boost.
Don’t Close Old Credit Cards
Keep old accounts open as it builds your length of credit history. But avoid using them so balances stay low.
When to Check Your Credit for a Mortgage
It’s smart to check your credit 6-12 months before applying for a mortgage. This gives you time to improve it if needed. Here’s a timeline:
- 6-12 months before – Check all three credit reports and scores. Start credit improvement efforts.
- 3-6 months before – Check your scores again. Continue credit score optimization.
- 1-2 months before – Check your scores one final time and fix any last issues.
- Before pre-approval – Verify your middle score is solidly where it needs to be for your target mortgage program.
Monitoring your credit in the year leading up to your mortgage application can help ensure there are no surprises. Keep diligently building your credit history.
What Credit Score do You Need for a House Loan? – Business Perspective
How Does Credit Risk Affect Lenders?
From a business perspective, mortgage lenders need to evaluate borrower risk in order to avoid defaults and foreclosures. Borrowers with lower credit scores are riskier and have higher default rates. To compensate, lenders charge higher interest rates or avoid lending to them altogether.
Do All Lenders Have the Same Minimum Scores?
Lending standards differ somewhat between banks, credit unions, and mortgage companies. Large banks may have higher credit score requirements while smaller lenders and online lenders may be more flexible. Government-backed FHA and VA loans allow scores as low as 580.
How do Lenders Make Money from Mortgages?
Mortgage lenders earn money through the interest borrowers pay on the loan principal over the loan term. Typically a mortgage rate has 4 components:
- Base rate determined by benchmark rates like 10-year Treasury yield
- Fees to originate the mortgage
- Lender margin or profit – usually 1.5-2%
- Borrower risk adjustment – higher for lower credit scores
By requiring good credit scores, lenders keep their own risks and expenses down while having greater assurance of on-time payments from borrowers.
Frequently Asked Questions
What credit score is considered good for a mortgage?
A credit score above 620 should qualify you for most traditional mortgage loans. 740 is considered excellent credit and will get you the lowest rates.
How can I quickly improve my credit score?
Paying down balances, disputing errors, and not taking on new debt before applying can quickly boost your score. Becoming an authorized user on a partner’s credit card can also help.
Does getting pre-approved hurt my credit?
Pre-approval requires a soft credit check which does not affect your score. But too many mortgage applications at different lenders can ding your credit, so apply strategically.
How long does negative information stay on my credit report?
Most negative marks like late payments and collections stay on your credit report for 7 years. Bankruptcies can stay for up to 10 years. Disputing errors can sometimes get items removed quicker.
Should I pay off a car loan or student loan before applying for a mortgage?
Paying off installment loans can help lower your DTI for mortgage qualification. But you don’t necessarily need to pay them off entirely before applying. Extra payments can help lower balances.
Final Thoughts
A credit score of 700 or higher will provide the best terms and lowest interest rate for your mortgage. Aim for a score of at least 620 if you want a good shot at getting approved. Take steps to boost your credit well in advance of applying through on-time payments, paying down balances, and limiting new credit inquiries. Check your scores 6-12 months beforehand and continue monitoring up until you apply. With good credit and preparation, you’ll put yourself on the path to mortgage approval and buying your dream home.
