What Credit Score Does a Mortgage Lender Require?

When thinking about purchasing a new house or refinancing your mortgage, you need to think about the credit score required by mortgage lender. The credit score required by mortgage lender can make or break your loan approval and will carry the most weight when it comes to determining your mortgage rate.

Lenders will rely on credit scores to measure your payment default risk. Other actors include down payment, assets, income, and property tax. Credit scores aren’t a perfect indicator but these scores do tell lenders a lot about you. The higher your score, the lower the interest rate, and the more loan options you will have.

What Credit Score Do Mortgage Lenders Use?

Mortgage lenders will use FICO scores, just like many other finance companies, as the credit score required by mortgage lender. While they use the FICO score, lenders will pull one version from each of the three major credit bureaus (TransUnion, Experian, and Equifax), in order to create what is called a tri-merge credit report. The mid score is used for qualifying and mortgage rates.

For example, if the credit scores from the report are 650, 680, and 720, then the lender would use the 680 score. If you only have two scores then the lender will only use the lower of the two for qualification purposes. If you only have one score then the lender will use that one. However, not all lenders will approve a borrower with just a single credit score since this means there is limited credit history.

FICO Score Factors

Why Know Your Credit Score before Applying for a Mortgage?

You should check your credit score three to six months before you apply for a mortgage to know exactly where you stand. During this time, you can also keep an eye on daily mortgage rates. This can give you time to fix any problems or errors that may come up and get to the minimum credit score required by mortgage lender.

It also helps to know the credit score range so you know what you need to do before you apply for a mortgage.

  • A 740 or higher is considered a great score
  • A score between 680 and 739 is an average score
  • Between 620 and 679 is a fair score
  • A score between 580 and 619 is a poor score
  • Anything below a 579 is considered a bad credit score

What Does a Low Credit Score Mean?

The credit score required by mortgage lender differs. However, a lower score can mean a few things. A lower credit score will mean higher mortgage rates. This means you will pay more each month. This is because of risk. The lower your credit score, then statistics say the higher chance you will default on the mortgage. Many lenders may not want your business if your credit score is too low. If you do get approved with a sub-par credit score then you will have a much higher mortgage payment and could be throwing money out the window.

FHA loans require a score as low as 500 but you will need to have at least a 10% down payment when your score is that low. You are able to qualify with just a 5.4% down payment with a 580 score or higher.

If you are choosing to go with a conventional mortgage than a score below 620 is typically considered subprime. This means that you can have a harder time qualifying for a mortgage and if you do, you will have higher rates.

What Is a Subprime Mortgage?

Subprime mortgages will refer to loans extended to a borrower with a higher risk than those that are referred to as prime. A prime borrower has little risk. A subprime borrower may have a lower credit score, a lower income, or higher debt load. There are two instances where a borrower may be considered subprime. This can be poor credit or no established credit.

Subprime Mortgage Loans For Bad Credit Borrowers

What Credit Score Required by Mortgage Lender Is Considered Good?

A credit score of 720 used to be good enough for a house mortgage but now a score between 740 and 760 is needed in order to secure the lowest pricing and to ensure that you qualify for the home loans that are available. FICO scores can go as high as 850 so a score within this range isn’t considered perfect. Even though credit scoring is just one of the factors that are used to judge borrowing capacity, it can impact how much you borrow and the max loan-to-value ratio. Therefore, good credit can get you better mortgage terms and conditions. 

How Your Credit Score Affects Your Interest Rates

Even if you have the credit score required by mortgage lender and can get approved for a mortgage, you need to know how your credit score will affect your interest rate.

A score of 579 or lower will mean that you will likely have an interest rate that is 2% higher than the current lowest rate. If your score is poor, you can expect an interest rate that is 1% higher than the lowest rate available. If you have a fair credit score then your interest is likely only going to be slightly affected and rates could be about .5% higher than the lowest rates. For the average credit score, rates won’t be affected too much. If you have a great credit score then you will be offered the best rates a mortgage company has to offer.

One of the easiest ways to see how your credit score affects your interest rates is with a real-world example. Take the average sale price of $366,000 with 20% down and a 30-year mortgage. There are two interest rates to use for this example: 5.76% and 4.17%. When your interest rate is 5.76%, your monthly payment will be $1,711 and the amount you will pay over the life of the loan is $615,802. If your interest rate is 4.17% then your monthly payment drops to $1,427 with a savings of $284 a month. The amount you pay over the life of the loan drops to $513,619 and you save $102,183 over the same time period. As you can see, there is a huge difference and there are plenty of things you can do with those savings.

Different Types of Loans

The credit score required by the mortgage lender will depend on different types of loans.

FHA Loan

For many first time homebuyers, they think they can’t qualify for a mortgage. But you may be able to qualify for a FHA loan. The Federal Housing Administration backs these loans. While the FHA doesn’t issue the loans, they will insure them in case the borrower defaults on the loan. This will reduce the risk of the lender, allowing them to reduce the credit score needed. You only need a 580 score or higher. A score lower may be possible but it can be unlikely.

VA Loans

VA loans are for veterans. Like FHA loans, the VA doesn’t act as a lender but will guarantee the loans. The biggest benefit of a VA loan is that there isn’t a down payment required and PMI is not required. Since there isn’t a down payment requirement and no minimum credit score needed, it offers many veterans with poor credit the opportunity to be a homeowner.

USDA Loans

These loans typically require a credit score of 620 or higher. These loans have some other basic eligibility requirements, which cover income, property usage, and home location.

Conventional Loans

This is a common loan type and you have probably heard of this before. A conventional loan is any mortgage that is offered by a private lender and isn’t guaranteed by a government agency. These are the most popular type of mortgage used today. Many conventional loan lenders will require a minimum score of 620 to 640. A higher credit score is even better. Conventional loans do usually require a higher down payment than most loans that are government-backed. Many lenders will require at least 5% down.

What Else Does Your Credit Score Affect?

Your credit score directly affects your loan eligibility but it can also affect the size of your down payment. With an FHA loan, you may be able to qualify for a lower down payment if your credit score is higher. If your score falls between 500 and 579 then you may have to put up 10% as long as you can even find a lender that approves your application. If your credit score affects your interest rate then you can expect a higher monthly payment. A higher monthly payment means that you may not have enough money in your budget every month in order to spend on other things. If you don’t have 20% down and your lender requires private mortgage insurance then your PMI premium can also be affected by your credit score. Lower scores will pay more in premiums.

Other Factors Lenders Consider

The credit score required by the mortgage lender is just one of the factors that lenders consider when applying for a residential mortgageThere are other factors to consider when taking out a mortgage.

Loan-to-Value Ratio

This ratio is about the relationship between the value of the property and the size of the loan against it. If you want to purchase a home that costs $240,000 and it appraises at $300,000 then the loan-to-value ratio would be 80%. A larger down payment can result in a lower LTV ratio. The lower the ratio, the better when looking at it from a lender’s perspective.

Down Payment Size

Many loans require a down payment. If you are able to put up a larger down payment, this may mean a lower interest rate.

Debt-to-Income Ratio

This ratio measure how much of your income is being used to pay debts each month. Lenders will calculate this by adding up monthly debt payments and then divide these payments by your total gross monthly income. The more money you have to pay out each month means that you may be more likely to default on the mortgage.

Employment History and Income

In order to qualify for a house mortgage, you need to have a stable income and steady job and you need to be able to provide proof. Lenders will review pay stubs, bank statements, and tax returns in order to assess your level of risk. Your current income will also be a key factor in determining how much home you can afford.

How to Improve Your Credit Score

Since you need a good credit score required by the mortgage lender, it is important to know ways to improve your score.

When you are beginning the process of improving your credit score, remember that it’s a marathon and not a sprint. However, improving your credit score will be worth the effort.

Make Sure Reports Are Accurate

The first step in improving your credit score is checking credit reports. Everyone will have three credit reports or one from each major credit bureau. Credit reports can have mistakes on them. Since the score is based on data that is in the report, it’s important that the reports have accurate data. You are entitled to a free copy once a year of all three of your credit reports so make sure that you use them. Is your personal information accurate? Are all your accounts being reported? Or, are there missing or late payments reported that you remember making? Are there applications or accounts you don’t recognize? Is there information from decades ago that still shows on the report? A credit report from one agency may have an error but another report might not so it helps to go through each one with a highlighter.

Figure Out What You Need to Improve

Just having an error on your credit report may not necessarily mean you have bad credit. So you will need to figure out what you can improve. If your credit report is accurate and you have a bad score then it’s important to understand why. There are different factors that impact your score. This includes payment history, amount of debt, the age of accounts, account mix, and history of credit.

Create a Plan

Once you know what you have done wrong, you can work on a plan to improve the score. In order to begin improving the score, aim to keep any credit card balances on the low end, along with other types of revolving credit you have. Start paying down debt instead of just moving it around. However, don’t close any unused credit cards as a quick fix. Don’t open new accounts or apply for a loan to increase the available credit you already have.

Fix Late Payments

Closing an account won’t make any late payments disappear. You have to get yourself back on track. Be sure to set up payment due date alerts so you can get organized. Check your payment due dates in relation to your paycheck schedule and change any that need it.

Build a Strong Credit Age

If you have a shorter credit history then there isn’t much that you can do to improve your credit. You can piggyback on a family member’s credit card if they have a good, long history of on-time payments. Be added as an authorized user in order to do this. However, if you don’t have anyone then wait it out and don’t close any of your accounts. A good age of credit history is five years or more.

Clear up Any Collections

Start paying off your debt instead of just transferring it to a new account. Contact the debt collector that is listed on the credit report to see if they would be willing to stop reporting the debt in exchange for any full payment.

Get a Credit Card

If you haven’t had a credit card before then your score can be suffering because of the account mix factor. When you do have a credit card, make sure your payments are on time. Late payments will likely hurt you more than anything. If you already have a good credit score and are looking to improve it then there could be many credit card options out there for you. If you have a poor credit, you can get a secured card. A secured credit card is one where you make a deposit into a checking account that will secure the line of credit you get.

Limit Any Credit Applications

The 10% discount that you get when you sign up for a store credit card may seem worth it but your credit score can take a hit when you apply, whether or not you get approved. A hard inquiry can impact your score for a full year, although it will start improving quickly. While the hit is small, if you apply for a few credit cards or are on the edge of two credit score tiers then it can be a lot more significant. Keep in mind that soft inquiries won’t affect your credit score. They are done when a lender is looking to give you a higher credit line or someone is checking your report as part of a background check. A soft inquiry can happen without your permission so it doesn’t affect your credit.

Work on Fixing Your Credit Utilization Ratio

If your credit card balance is 30% or more of your credit limit each month then your score is suffering. This affects your score even if you are paying off balances each month by your payment due date. It’s the statement balance that is being reported to the credit bureaus. So keep an eye out for balances and consider pre-paying a balance if you know you will be close to that mark. There is a difference between the credit utilization ratio and debt-to-income ratio. The credit utilization ratio is the thing that affects your credit score. The debt-to-income ratio can be used by lenders and can be a factor when deciding whether or not you get a loan or credit.

Conclusion

The credit score required by mortgage lender will vary depending on the lender and the type of loan you are applying for. Lenders use FICO credit scores, so it’s a good idea to check your score before you apply for a mortgage. This will help you know where you stand on the scale. Your credit score affects a lot of different things as it relates to mortgages. If you know the credit score required by a mortgage lender, you can start doing different things to improve your credit score so you can meet those minimums.

Shopping for mortgage loans for your credit score will save you a lot of time, effort, and inquiries on your credit report. Make sure you only take into account reputable lenders. You can enter your information below and you may get an offer from a lender whose criteria you meet:


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