Are you considering buying a house, and making sure your credit is ready? Here’s what you need to know.
How Your Credit Score Impacts Your Mortgage Prospects
If you’re planning to buy a home, your credit score will play a big part in the process. At the start, it will determine which loan options you can even consider as a homebuyer. While some loan types require minimum scores as high as 640 (conventional adjustable-rate loans), others go down to 500 (some FHA loans). Your credit score will also impact the costs of your loan, because your credit score represents your level of risk to a mortgage lender. A higher score means that you pay your bills on time and can be expected to repay your mortgage just the same. As a result, you’ll qualify for lower interest rates. If your score is low, however, that means you’re a risky bet for a lender. To compensate for the extra risk—that chance you won’t pay your loan or might foreclose on the house—they’ll boost the interest rate to protect themselves. Suppose you’re purchasing a $250,000 home in Texas and putting 10% down. In 2019, according to the Consumer Financial Protection Bureau, your interest rates would most likely have looked like this: Mortgage rates hit historic lows in 2020 and 2021 as a result of the COVID-19 pandemic, but have since bounced back to pre-pandemic levels. Here’s the range of interest rates you can expect based on your credit score in 2022:
Conventional loans, which are backed by Fannie Mae and Freddie MacFHA loans, or those from the Federal Housing AdministrationUSDA loans, which are designated for rural properties and are guaranteed by the U.S. Department of AgricultureVA loans, which are designed for military members and veterans
Each of these loans has different credit score requirements. Here’s how they break down:
FHA loans: Minimum 500, with an average score of 680Conventional loans: Minimum of 620 to 640, depending on the type of loanUSDA loans: Minimum 580 though 640 preferredVA loans: No credit score requirement
What Kind of Credit Report and Score Do Lenders Use?
There are several versions of your credit score, depending on who issues the score (a bank, FICO, or VantageScore) and the lending industry (auto, mortgage, or credit card). To offset their risk and ensure that they’re getting the most accurate picture of a mortgage borrower, most lenders will use what’s called a “tri-merge” credit report showing credit details from multiple credit bureaus. Alternatively, they may use a “residential mortgage credit report,” which may include other details about your financial life, such as rental history or public records. These reports reveal the borrower’s credit details from multiple bureaus—TransUnion, Experian, or Equifax—or all three. In many cases, the credit score you see as a consumer—possibly through your bank or credit card company—is different from what a potential mortgage lender would see.
Improving Your Credit Score
There’s a lot that goes into determining your credit score, including your repayment history, the total balances on your accounts, how long you’ve had those accounts, and the number of times you’ve applied for credit in the last year. Improving in any of these areas can help increase your score. You can:
Pay down your existing debts and credit card balancesResolve any credit issues or collectionsAvoid opening new accounts or loansPay your bills on time, every time
You should also pull your credit report and check for any inaccuracies you might see. If you find any, file a dispute with the reporting credit bureau, and include the appropriate documentation. Correcting these inaccuracies could give your score a boost. By law, you are entitled to a free copy of your credit report from each of the three credit bureaus every year. However, as of April 20, 2020, the three major credit bureaus—Equifax, TransUnion, and Experian—increased the frequency to once per week, in a program that was set to expire after one year. It has since been extended, enabling individuals to get a free copy of their credit report weekly through 2022.
