A home is one of the most complex purchases you can make. Not only do you have to search for the right house, but you have to make sure you meet the requirements of mortgage lenders. And that means having a high enough credit score (among other things).
But what exactly does that mean? Here’s what you need to know about credit score requirements for mortgages.
This is the credit score you need to get a mortgage
One of the most frustrating things about credit scores is that each lender has its own requirements to qualify for a mortgage. The vast majority of mortgage lenders will want to see a FICO® Score of at least 620, though some have lower or higher minimums. For example, FHA loans are available to some borrowers with a score as low as 500, while some lenders may not offer you a mortgage unless your score is in the 700s.
The higher your score, the better your chances of qualifying for a mortgage and securing a lower interest rate. However, the difference in rates by score may not be as pronounced as you imagine.
According to the latest available data from FICO, someone with a 660 credit score would get an average mortgage interest rate of 6.62%, with a monthly payment of $1,382 for a $216,000 30-year, fixed-rate mortgage. But if your score is 760, the interest rate would be 6.6%, with a $1,380 monthly payment. (Keep in mind that this applies to those above the minimum requirement of 620.)
Even so, a lower score may also impact your down payment requirement and your borrowing limit. So it’s still a vital part of the equation.
How to improve your credit when preparing to buy a house
Tracking your credit score is an excellent first step to making sure you can get approved for a mortgage. There are many free options available for doing that, including Experian. Some credit card companies, like Discover, also offer credit monitoring to their cardholders. You typically have to provide some personal details to opt in to this kind of service.
After that, take steps to address the most impactful FICO® Score factors, such as payment history (which makes up 35% of that score) and amounts owed (30%). Signing up for autopay on all of your bills and paying down revolving debt is vital here. The latter is especially helpful since lenders also look at your debt-to-income (DTI) ratio. That should be at or below 36%, and the lower you can get your DTI ratio, the better.
Keep in mind that if you’re applying with a co-borrower, mortgage lenders consider your median score. That means if your credit score is below a lender’s minimum requirement, you may still be able to qualify for a mortgage if your co-borrower has a higher score.
Buying a home can be scary, and the road to securing your mortgage can take time, especially if you have a low credit score. But if you manage to pay off the debt that’s weighing on your credit score and consistently pay your bills on time and in full, it’s possible to get the lowest mortgage rates on the market.