However, understanding the meaning of your score, how it’s calculated, and how it can influence your mortgage eligibility and the interest rates you pay is not as easy as it sounds. Below, we break down all of these topics.
Explaining Your Credit Score
The FICO credit score (created by the Fair Isaac Corporation) is one of the most common scores used by lenders to determine your mortgage eligibility, and it’s a component of pricing (i.e., the interest rates and fees you’ll pay to get your mortgage).
While exact scoring models may vary by lender, some variation of the standard FICO score is often used as a base. FICO takes different variables on your credit report, such as those listed below, from the three major credit bureaus to compile your score, which ranges from 300 to 850:
Payment History
Roughly 35% of your credit score is based on your history of timely payments on money you owe. If you’ve made your payments on time and in full in the past, there’s a good chance you’ll do the same in the future, so your credit score may be higher. If you’ve had any tax liens, late payments, lawsuits or bankruptcies, they can result in a lower credit score.
Amount Owed
Roughly 30% of your score is based on the amount of money you owe. Higher balances tend to lower your credit score, while lower balances can positively impact it.
Length of Credit History
About 15% of your score is calculated on the length of your credit history. Typically, the longer you’ve had credit accounts open, the higher your score can be.
Lacking a credit history may not hurt you when it comes to FHA and VA loans, but a good credit history is essential when you’re applying for a conventional loan.
Types of Credit
Types of credit determine about 10% of your credit score. This refers to the variety of types on your report, including installment debt such as credit cards and store cards as well as revolving debt such as student loans, auto loans or mortgages. Having a mix of installment and revolving debt can help prove you can handle different types of payments.
New Credit
About 10% of your score is determined by new lines of credit. Opening up multiple lines of new credit too quickly can negatively impact your credit score, as it may look like you’re desperate for credit. Asking for multiple lines of credit and receiving multiple credit inquiries also has the potential to hurt your score, even if you don’t end up opening new accounts.
Note that there are two types of credit inquiries – one for lending purposes and one for educational purposes. Inquiries for lending purposes may ding your credit score by a few points. However, getting your credit pulled by a company like QLCredit, which shows you your report and score for educational purposes, won’t impact your score.
If you’re shopping around for the best credit or loan terms, don’t worry. Multiple credit inquiries over a short period of time for the same type of loan will be grouped together as one inquiry, so your score won’t be as heavily influenced.
Minimum Credit Score Requirements
You may be wondering, “What credit score do I need to buy a house?” Unfortunately, you won’t be able to find an exact answer. There are several factors that go into qualifying for a mortgage besides your credit score, such as the type of loan you’re applying for as well as your income and debt levels. Because of this, there isn’t an exact number you need to qualify. Some guidelines are listed below.
Conventional Mortgages
Conventional mortgages are home loans that follow the standards set by Fannie Mae and Freddie Mac. They’re uninsured by the government and known for lower down payments and good interest rates. These are typically best for those with good or excellent credit, as these loans require a higher credit score than an FHA loan.
These loans tend to offer the most competitive interest rates and offer flexible repayment periods, such as 15- and 30-year mortgages. While you may pay more money up front, you can save more money over the course of a conventional loan than you would with an FHA loan.
Minimum Credit Score for Conventional Loans
At Quicken Loans, your credit score for a conventional loan must be 620 or higher. Various lenders have different requirements and may require a different score.
FHA Loans
Backed by the Federal Housing Administration, FHA loans are insured by the government, making them easier to qualify for than conventional loans. They offer down payments as low as 3.5% and low-equity refinances, which allow you to refinance up to 97.75% of your home’s value.
FHA loans can benefit borrowers with lower credit scores or those who spend a significant portion of their income on housing. New homeowners or current homeowners who are underwater on their mortgage and could lower their monthly payment by refinancing may also benefit from an FHA loan.
Minimum Credit Score for FHA Loans
The minimum FICO score for an FHA loan through Quicken Loans is 580, with a 3.5% minimum down payment. Other lenders may have different requirements.
For a standard FHA loan, a minimum of one credit score is required for you to qualify. If your lender obtains all three of your credit scores, they’ll take the middle score into consideration. If you apply for a mortgage with your spouse, lenders will use the lower of the two credit scores.
Better Credit Scores Lead to Greater Odds of Getting Approved
It’s important for you to know your credit score and understand what impacts it before you begin the mortgage process. Once you understand this information, you can begin to positively impact your credit score or maintain it so you can give yourself the best chance of qualifying for a mortgage.
It is possible to qualify for a mortgage with a relatively lower credit score but a high income and low levels of debt. It’s also possible to be turned down for a mortgage if your score is relatively higher, but you have high levels of debt and a lower income. Note that credit score requirements should be used as a guideline, as debt levels, income and down payments will also be taken into consideration when determining your mortgage eligibility.
Are you ready to start the mortgage process? Contact Adam at 630-697-4500 to get started!
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