When you apply for a mortgage, your credit score is one of the top factors that impacts your interest rate. Typically, the higher your score, the lower the interest rates you’ll be offered by lenders.
Before you look at houses, it’s smart to check your credit scores and pull your reports from the three major credit agencies. You can check your score on myBankrate for free to see where you stand. Tackling credit issues early on can help you raise your score before you apply for a mortgage.
What is a good credit score for buying a house?
Many lenders use the Fair Isaac Corporation (FICO) model for credit scores, which grades consumers on a 300- to 850-point range, with a higher score indicating less risk to the lender. Generally, a score of 800 or higher is considered exceptional; 740 to 799 is very good; 670 to 739 is good; 580 to 669 is fair; and 579 or lower is poor.
Although it’s up to the specific lender to determine what score a borrower must have to be offered the lowest interest rates, the difference of a few points on your credit score can affect t your monthly payments by hundreds of dollars.
“The good news is there are published interest rates for people who have scores as low as 620, which is about 80 points below the national average,” says John Ulzheimer, author of “The Smart Consumer’s Guide to Good Credit.”
A loan comparison calculator can help you see how much a loan costs at varying interest rates.
In the below example from myFICO.com, borrowers with credit scores above 760 save as much as $193 in monthly payments for a 30-year, $200,000 mortgage compared to borrowers with scores ranging from 620 to 639. That adds up to $69,751 in interest payments over the life of the loan.
Using myFICO.com’s loan savings calculator, here’s how much you’d pay at today’s rates for each credit score range. Examples are based on national averages for a 30-year fixed loan of $200,000.
|FICO score||APR||Monthly payment||Total interest paid|
- If your score changes to 700-759, you could pay an extra $9,375.
- If your score changes to 680-699, you could pay an extra $16,938.
- If your score changes to 660-679, you could pay an extra $26,187.
- If your score changes to 640-659, you could pay an extra $45,105.
- If your score changes to 620-639, you could pay an extra $69,751.
“I’ve talked to people who are keenly aware of their score but are hard-pressed to tell me what that means in terms of what they qualify for,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling.
Can I get a mortgage with a low credit score?
The short answer: yes. But a lower score means you’ll likely receive higher interest rates and, in turn, higher monthly payments. Also, lenders may be more stringent about other aspects of your finances if your credit score is less than stellar.
Keep in mind that credit requirements vary from lender to lender. Do yourself a favor and shop around with multiple lenders to find one that will work with you especially if your credit is tarnished.
Here’s a quick rundown of typical minimum credit scores for different loan types:
Conventional loans: Many lenders will accept a credit score as low as 620 for conventional loans, but some lenders may have additional requirements such as lower outstanding debt on top of that.
FHA loans: The Federal Housing Administration guarantees loans for borrowers with less-than-ideal credit and lowdown payments. You can qualify for an FHA loan with a credit score of 500 to 579 with a 10 percent down payment. FHA’s maximum financing of 3.5 percent down is available for borrowers with a score of 580 or higher.
VA loans: Backed by the U.S. Department of Veterans Affairs, VA loans are offered to active and veteran military personnel and their families. The government doesn’t have a minimum credit score requirement to qualify for VA loans, though many lenders require a minimum score of 620.
USDA loans: The U.S. Department of Agriculture backs the USDA loan program for low- to moderate-income borrowers purchasing a home in a rural area. Borrowers generally need a minimum score of 640 to qualify for a USDA loan. In some cases, USDA lenders will consider a lower score with additional analysis of a borrower’s credit.
Jumbo loans: These loans, which apply to loan amounts that exceed conforming loan limits, are the hardest to qualify for if you have bad credit. At minimum, jumbo lenders require a credit score of 720 or higher to qualify because of the increased risk.
Tips to boost your credit score
If your credit score isn’t great, there are still options. Instead of just settling for the mortgage rates you’re currently qualified for, consider postponing home ownership and working to revive your score and improve your options. Here are some quick tips to help:
- Check your credit report and correct any errors.
- Pay down credit card balances below 30 percent of your maximum limit.
- Pay all bills, including rent, credit cards and loans, on time.
- Don’t close older credit lines after paying them off.
- Avoid opening any new lines of credit or taking out large loans.
- When your credit has improved, rate-shop within a 30-day window. Spreading out the inquiries can hurt your score.