Ah, the dreaded credit score. It's one of the most important criteria lenders consider when applying for a mortgage – three tiny little numbers that can mean the difference between yes and no, between moving into the home of your dreams and finding another overpriced rental property. But despite its enormous importance, the credit score remains mysterious in many ways. If you don't know your number, uncertainty can hang over you like a dark cloud. Even if you know it, the implications may still be unclear.
Is my score good enough to get me a loan? What is the best credit score to buy a home with? What's the average credit score to buy a home? What is the minimum credit score to buy a home? Does a high credit score guarantee that I'll get the best deal? And is there a direct correlation between credit score and interest rate or is it more complicated than that? These are all common questions, but they usually go unanswered. To date.
Today, the secrets of credit score are revealed.
The basics. What is a credit score?
Your credit score isn't just for getting a mortgage. It paints an overall financial picture. The term "credit score" usually refers to the FICO score, a number between 300 and 850 that represents a person's creditworthiness – the likelihood that if they get a loan, they will be able to pay it back. A higher number corresponds to a higher credit score, so a person with a FICO score of 850 is almost certain to pay their debts, while a person with a score of 300 is considered highly unlikely to make their payments.
The formula for calculating the FICO score was developed by Fair, Isaac and Company (now simply called FICO), and while the details remain secret so no one can manipulate the system, FICO has made the components of the score public. The formula considers the following factors in descending order of importance:
- Payment history – have you paid your debts on time in the past?
- Debt amounts – How many lines of credit do you have and what is the balance on each line?
- Length of credit history – how long have you been using credit?
- New credit – have you opened multiple credit accounts recently?
- Used credit types – What combination of credit cards, retail accounts, installment loans and mortgages do you have?
In general, the first two factors, payment history and amounts owed, account for 35% and. 30% of your total score from. Length of credit history accounts for 15% and the last two factors, new credit and types of credit used, each account for 10%. But these weights can vary for each individual borrower.
All the information needed to calculate your credit score can be found in your credit report, a detailed history of how you've handled debt in recent years. If you missed payments on your Visa card, opened a new MasterCard, paid off a car loan or forgot to pay your bill at Sears, it will show up on your credit report. Before you apply for a loan, it's a good idea to get a copy of your report and find out about your credit score. This will save you from unpleasant surprises and allow you to correct any mistakes you may have made.
What is a good credit score to buy a home?
If only it were that simple. When answering the question, "What credit score do you need to buy a home??" there is no general rule. Here's what we can say: If your score is good, say higher than 660, then you'll likely qualify. Of course, this assumes that you buy a house you can afford and apply for a mortgage that makes sense for you. Assuming this is all true, and you are in the realm of financial sanity, a 660 should be enough to get you a loan.
Anything lower than 660 and all bets are off. This does not mean that you will definitely not qualify, but the situation will be much more opaque. In fact, the term "subprime mortgage" refers to mortgages given to borrowers with credit scores below 660 (some say below 620 or even 600). In these cases, lenders rely on other criteria – reliable sources of income, solid assets – to override low credit scores.
If we had to name the absolute lowest credit score for buying a home, it would probably be somewhere around a FICO score of 500. It is very rare for borrowers with this type of credit history to get a mortgage. So while it's technically possible to get a loan with a score of, say, 470, you're better off spending your financial energy on improving your credit report first and then trying to get a loan. If you use SmartAsset's tools to answer the question, "What credit score is required to buy a home??" use, we advise anyone who has a credit score of less than 620 to wait to get a loan.
Look for a way to calculate your monthly mortgage payment? Check out our mortgage calculator.
What interest rate can I get with my credit score?
While a specific credit score is not a guarantee of a specific mortgage rate, credit scores have a fairly predictable overall effect on mortgage rates. Let's first assume that you meet the highest standards in all other criteria of your credit application. You must make a down payment of at least 20% of the home's value, you have additional savings for emergencies, and your income is at least three times the total payment. If all of that is true, here's how your interest rate could affect your credit score.
- Excellent (760-850) – your credit score does not affect your interest rate. You will likely be offered the lowest interest rate available.
- Very good (700-760) – your credit score may have a minimal impact on your interest rate. You could be offered interest rates that are 0.25% higher than the lowest available interest rate.
- Good (660-699) – your credit score may have a small impact on your interest rate. This means that interest rates as much as 0.5% higher than the lowest available rates are possible.
- Moderate (620-660) – your credit score will affect your interest rate. Expect interest rates up to 1.5% higher than the lowest available interest rate.
- Poor (580-620) – your credit score will greatly affect your interest rates. You can expect to pay interest rates that are 2-4% higher than the lowest rates available.
- Very poor (500-580) – This means trouble. If you are offered a mortgage, you will have to pay very high rates.
Consider this as a rough guide. Depending on your individual circumstances, the impact of your credit score on your interest rate may be smaller or larger than those listed above, but the general message should be clear. A credit score below 660 can make getting a mortgage significantly more expensive. How much more expensive depends on the amount of credit you take out and the rest of your financial situation.