When it comes to mortgages and credit scores, there are two really important questions to ask:
–What credit score do I need to qualify for a mortgage?
–What credit score do I need to get the lowest interest rate on a mortgage?
These different but related questions are important if you are looking to buy a home. And the second question is particularly important. With a high FICO score, you can literally save tens of thousands of dollars in interest over the life of a home loan. So let’s take a look at both questions. And if you don’t know you score, be sure to get you free credit score.
What credit score do you need to qualify for a mortgage?
The first thing to keep in mind is that qualifying for a mortgage involves a lot more than just a credit score. While your FICO score is a very important ingredient, it is just one factor. Lenders also look at your income and level of debt, among other things.
As a rule of thumb, however, a credit score below 640 will make buying a home very difficult. A FICO score below 640 is considered sub-prime. In the past there were mortgage companies that specialized in sub-prime mortgages. Because of the challenges in the credit market over the last year or so, however, sub-prime loans have become difficult if not impossible to obtain.
A FICO score between 620 and 650 is considered fair to good credit. But keep in mind, this range of credit scores does not guarantee you will qualify for a mortgage, and if you do qualify, it won’t get you the lowest interest rate possible. Still, to buy a home aim for a score of at least 640, recognizing that other factors weigh in the decision and that some banks may require a higher score.
What credit score do you need to get a low rate mortgage?
It use to be that a score of about 720 would yield the lowest mortgage rates available. Today, the best rates kick in with a FICO score of 760. And interest rates go up significantly as your credit score drops. To give you an idea, the following table shows current rates by credit score and calculates a monthly principal and interest payment based on a $300,000 loan:
FICO Score; 30-year Fixed Rate Mortgage
FICO Score APR Monthly Payment
760-850 4.643% $1,546
700-759 4.865% $1,586
680-699 5.042% $1,618
660-679 5.256% $1,658
640-659 5.686% $1,739
620-639 6.232% $1,844
Of course, the interest rates change daily, but the above table gives you an idea of the importance of a high score when you apply for a mortgage
In today's tight economy, more than 25 percent of consumers -- an estimated 43.4 million people -- have a credit score of 599 or below, according to recent numbers released by FICO. "And while the FHA program will write mortgages with the same great interest rates all the way down to a credit score of 580, other low-rate offers will generally require a score of 720 or higher," said Keith Gumbinger, Vice President of HSH.com.
Excellent Good Fair Poor
You'll be offered better mortgage rates with a higher credit score, says Gumbinger, and that translates into savings. Get offered a 6 percent rate instead of 5 percent on a $200,000, 30-year mortgage, and you'll wind up paying about $125 more each month.
Here's what you can do to raise your credit scores and get on the path to home ownership.
Know how your score works
Your overall credit score is made up of several factors, and each is weighted differently. Since different credit behaviors can have different effects on your score, it's important to know how they works.
Here's the breakdown of which factors affect your credit score:
•Payment history (35 percent)
•Amounts owed (30 percent)
•Length of credit history (15 percent)
•New credit (10 percent)
•Types of credit used (10 percent)
Get credit savvy
Think about how your financial behavior affects your credit score. Do you carry a balance on your credit cards? If so, that hurts your score in terms of amounts owed. If you open too many new lines of credit, mortgage lenders will see you as desperate. Making late payments causes creditors to think you're insolvent. These are all things that will drop your credit score.
Check your status
"You'll want to review your credit reports six months or more before a large credit event like applying for a mortgage," says Gumbinger. It can take quite some time to clear up any errors or solve legitimate disputes, and you want those things off your report when you fill out mortgage applications.
Even if you're not in the market for a mortgage, you'll still want to review your credit reports at least once each year. You're entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) each year. Stagger receiving the reports, and you'll have a credit update once every four months. You can access your free reports at www.annualcreditreport.com.
Pay on time
"Be extra careful to make each [of] your minimum payments on time each month," says Barry Paperno, product support manager for FICO, inventor of the FICO score. "If you're late making payments now, bring them current immediately and keep them current." Your payment history makes up the largest part of your credit score (35 percent), and it takes longer to raise your score after late payments than it does for some other issues.
Pay down debt
Since the FICO formula looks at your credit card limits and balances, both individually and in total, shifting balances around won't make your bottom line look any better. Instead, you'll want to pay down balances while continuing to use the cards, says Paperno. Ideally, you'll want to aim for a utilization percentage, both individually and in total, of under 10 percent. That means you're using less than 10 percent of available credit on any one of your cards.
Don't close accounts
Length of credit history is another important part of your credit score, so closing old accounts could actually hurt you. That's because potential mortgage lenders want to know you've been responsible with credit for a good long time. Keep older accounts active by making small charges on each one at least every few months and then paying those charges off right away, advises Paperno. "Using your cards regularly keeps them active, which ensures that your credit limits on these cards continue to be open and included in your credit utilization. Contrary to popular belief, you won't be penalized for having lots of available credit.
The three major national credit reporting companies (CRCs) are: Equifax, Experian and TransUnion. These firms collect information about your borrowing and repayment behavior from lenders and businesses that have extended credit to you. This information is compiled into a credit report. You can obtain a copy of your credit report from each of the three companies for a fee. You are also entitled to a free copy within 60 days of being denied credit from the CRC that supplied the lender with your report.
Consumers can obtain a free copy of their credit reports once a year from each of the three national credit reporting companies at annualcreditreport.com or by calling 1-877-322-8228.
Several organizations within the federal government make information available about credit reports and credit scores, including the following:
Your Credit Report
Q: What is a credit report?
- Your identity. Your name, address, full or partial Social Security number, date of birth, and possibly employment information.
- Your existing credit. Information about credit that you have, such as your credit card accounts, mortgages, car loans, and student loans. It may also include the terms of your credit, how much you owe your creditors, and your history of making payments.
- Your public record. Information about any court judgments against you, any tax liens against your property, or whether you have filed for bankruptcy.
- Inquiries about you. A list of companies or persons who recently requested a copy of your report.
Q: Why is a credit report important?
- Lenders may use your credit report information to decide whether you can get a loan and the terms you get for a loan (for example, the interest rate they will charge you).
- Insurance companies may use the information to decide whether you can get insurance and to set the rates you will pay.
- Employers may use your credit report, if you give them permission to do so, to decide whether to hire you.
- Telephone and utility companies may use information in your credit report to decide whether to provide services to you.
- Landlords may use the information to determine whether to rent an apartment to you.
Q: Who collects and reports credit information about me?
Q: Where do credit bureaus get their information?
Q: How can I get a free copy of my credit report?
- visiting www.annualcreditreport.com or
- calling (877) 322-8228.
Q: Who else is allowed to see my credit report?
- lenders from whom you are seeking credit;
- lenders that have granted you credit;
- telephone, cell phone, and utility companies that may provide services to you;
- your employer or prospective employer, but only if you agree;
- insurance companies that have issued or may issue an insurance policy for you;
- government agencies reviewing your financial status for government benefits; and
- anyone else with a legitimate business need for the information, such as a potential landlord or a bank at which you are opening a checking account.
Q: Does the credit bureau decide whether to grant me credit?
Q: How long does negative information, such as late payments, stay on my credit report?
Q: What can I do if I am denied credit, insurance, or employment because of something in my credit report? What can I do if I receive less favorable credit terms than other consumers because of something in my credit report?
Q: I've been receiving unsolicited credit offers. Why? Can I opt-out of receiving these offers?
Your Credit Score
Q: What is a credit score? How is my credit score calculated?
- the number and type of accounts you have (credit cards, auto loans, mortgages, etc.);
- whether you pay your bills on time;
- how much of your available credit you are currently using;
- whether you have any collection actions against you;
- the amount of your outstanding debt; and
- the age of your accounts.
Q: What can cause my credit score to change?
Q: How can I get my credit score?
- Equifax: Call 1-800-685-1111 or
- Experian: Call 1-888-397-3742 or
- TransUnion: Call 1-800-493-2392 or
Q: How can I improve my credit score?
Credit Report Errors
Q: How can I correct errors found in my credit report?
- Equifax www.equifax.com/answers/correct-credit-report-errors/en_cp
- Experian www.experian.com/disputes/
- TransUnion www.transunion.com/corporate/personal/creditDisputes.page
- Provide information about yourself, such as your name, address, date of birth, and Social Security number;
- Identify specific details about the information that is being disputed and explain the basis of your dispute;
- Have a copy of your credit report that contains the disputed information available; and
- Provide supporting documentation, such as a copy of the relevant portion of the consumer report, a police report, a fraud or identity theft affidavit, or account statements.