What’s the most important piece of information about you when it comes to getting a mortgage? Is it your age? Your income? Your debt load? Your taste in architecture? All are important (well, there’s no accounting for taste), but there’s one thing that rules them all: your credit score.
Lenders use your credit score to gauge what kind of risk you pose as a borrower. The higher your score, the lower the risk you present to lenders, and the likelier it is you’ll be offered a mortgage with an attractive interest rate. And a low interest rate matters — a difference of only 0.5% in your interest rate can add up to thousands of dollars over the term of your mortgage, so it pays to have a high score!
While there are other methods for calculating credit scores, FICO (named after its creator, Fair Isaac Corporation) is the method used by most financial institutions and credit bureaus. According to myfico.com, 90% of top lenders use FICO scores to make decisions about credit approvals, terms, and interest rates, so that’s what we’ll be focusing on. You can learn more about how your FICO score is calculated here.
Your FICO score will play an important role in determining whether you qualify for a mortgage, and what interest rate you’ll be offered. Lenders will take a close look at your score using a special credit report called a tri-merge credit report, unique to the mortgage industry. The report pulls and merges your credit data from each of the three main agencies (Experian, TransUnion, and Equifax). Your credit score from each agency is included and the mortgage provider will often use the middle number of the three agency scores for your mortgage application. If you don’t know your current score, you can start by checking your score from FICO at myfico.com.
When it’s time to get a mortgage, there will be different credit score requirements — depending on the type of mortgage you can get. Let’s take a look at the different requirements.
A typical mortgage is called a “conventional mortgage.” Fannie Mae and Freddie Mac are government-sponsored enterprises (GSE’s) that set the standards for what qualifies as a conventional mortgage and will back those mortgages that qualify. Lenders prefer borrowers who qualify for a conventional mortgage because the government’s insurance reduces their risk. This is the mortgage you likely want because it will probably offer you the lowest interest rate.
The ideal target credit score to have when applying for a conventional mortgage is 740 and higher but you may be able to get one with a credit score as low as 620. You can get a mortgage with a lower score, but the interest rate and terms will likely be less favorable because you’ll be seen as a higher risk by lenders.
That being said, there are some government departments, such as the Federal Housing Authority (FHA), the U.S. Department of Agriculture (USDA), and Veteran’s Affairs (VA) that will give you an attractive mortgage with a lower credit score if you meet their eligibility requirements.
The Federal Housing Authority’s mandate is to encourage home ownership. One of the ways they help bring that about is to insure home loans for people with poorer credit. You may qualify for an FHA loan with a credit score of as little as 500. A credit score of 500-579 will require you to put down a down payment of at least 10% of the home’s value, while a credit score of 580 or more will drop your down payment requirement to as little as 3.5% of the home’s value.
The VA Home Loan Program offers home loans to those who meet the eligibility requirements for Veterans, active duty, and retired service members. There is no set credit score requirement for VA loans, but lenders typically use 640 as a common benchmark for them. And VA loans also do not require a down payment.
The USDA guarantees home loans to rural homebuyers who meet the eligibility requirements. The USDA doesn’t set a minimum credit score either, but lenders typically require a credit score of at least 640.
As you can see, unless you’re applying for an FHA loan, your credit score should be at least 640 to qualify for most mortgages. Now that you know what you need, it’s time to figure out what you’ve got.
Doctors and dentists can also qualify for what’s called a Physician Mortgage. A physician mortgage recognizes that doctors and dentists may be carrying significant student loan debt from their education but are still a reasonably low-risk borrower given their creditworthiness and earning potential. Physician mortgages have fewer restrictions than conventional mortgages but typically need a credit score around 700 or higher to qualify.
All this talk of credit scores probably has you wondering what your score is. Luckily, there’s an easy way to find out. There are three main credit bureaus in the U.S.: Equifax, TransUnion, and Experian and you can request a free credit report on yourself from each of them once a year. Just go their websites, fill out the application, and they’ll send you your report.
It’s a good idea to do this once a year to make sure there aren’t any mistakes in your report. Mistakes can, and do, happen from time to time and better to catch them early and before you need something that requires a credit check – like applying for a mortgage!
If your score is below 740, don’t despair because there are ways to fix and improve it. Credit scores are not static, they’re calculated monthly. Repairing poor credit takes time and dedication but it can be done. It just takes a little dedication and focus – the same kind it takes to save for a down payment on a house.
Your credit score is the key criteria lenders use to evaluate your risk as a potential borrower. The higher your score is, the lower the interest rate you’ll likely be offered. But even if your score isn’t in the top tiers, you can still get a mortgage as well as fix and improve your credit score. If you’re thinking about buying a home, or refinancing your current mortgage, figure out what your credit score is and then look for a lender that will meet your needs. Laurel Road offers mortgages, mortgages for doctors, and mortgage refinancing options as well. Get started by checking your rate and find the option that’s right for you.
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