What credit score do I need for a mortgage?
The Fair Isaac Corporation is used by most lenders to check credit scores, and a FICO score helps lenders assess an applicant's credit risk for a mortgage loan.
A credit score of 620 is typically the minimum score needed to qualify for most mortgages, according to the FHA Home Loans website. However, you can qualify for mortgages with a lower score.
Credit Score Ranges
The Lending Tree website indicates that credit scores lower than 620 are considered sub-prime. Scores between 620 and 650 are considered good, though may still be viewed a high risk.
A score of 720 or above is considered excellent by the FICO scale, according to the Lending Tree website. In general, the higher your credit score, the better interest rate you will get on your mortgage loan, which can save you thousands over the life of the loan.
Low Credit Score Lenders
If your score is lower than 620, you still might qualify for a mortgage loan. Most lenders require a good or excellent credit score, but other lenders specialise in lending to low score borrowers with scores around 500, according to the Lending Tree website.
However, these types of lenders require additional documentation, including older financial statements and W-2s to support the application. Beware that a higher interest rate is also common with these loans, so it might make more sense for you to work on improving your score and applying for a loan in a year or so. Both Fannie Mae and Freddie Mac offer mortgages to those with lower credit scores, according to the Lending Tree website.
Credit Score Tips
It is important to understand your current credit score and avoid risk factors, which can bring your score down. However, checking credit scores too often can actually hurt your score, so check once, improve what you can and check again at least a few months later. Even if you have a low credit score around 400 or 500, you can improve it to 720 or higher within a few years.
MSN indicates that to improve your credit score, you should pay down all credit card debt and catch up on any missed or late payments. Then, use the cards, but pay the balance each month rather than accumulating more debt. If any errors show up on your credit report, ask your creditors to report the fixes to the credit bureaus as soon as possible. Finally, avoid making large credit purchases prior to applying for mortgage, as the purchase can hurt your score.
While most lenders use the FICO scale to assess applicants, other lenders may use other agencies such as Scorex. FICO scales are customised to fit the lender's risk assessment.
Due to this fact, applicants should be aware that different lenders might quote different scores when processing an application, regardless of creditworthiness. If you notice a significant difference from one score to another, review your credit report thoroughly to look for mistakes or items that have not been reported to all credit bureaus.
Additional Lender Considerations
It is important for applicants to understand that credit scores are not the only factor in qualifying for a loan; lenders also consider additional information.
These factors include the applicant's salary, employment history, savings and debt-to-income ratio, which measures your monthly debt expenses versus your monthly income. A good debt-to-income ratio is 36 per cent or less.
This is important information for applicants to be aware of because there is no numerical guarantees in the lending process, and ultimately the final decision will be made by the lender. The better your financial situation and credit score, the better chance you have for mortgage loan approval.