If you’re thinking about purchasing a new home or refinancing your existing mortgage, you should know that your credit score is hugely important.
Banks and mortgage lenders use your credit score(s) to evaluate your creditworthiness, which translates to a higher or lower mortgage interest rate, and even determines eligibility.
Which Credit Score Do Mortgage Lenders Use?
First and foremost, you might be wondering which credit score mortgage lenders use, seeing that there’s no sense focusing on something they won’t actually look at to determine your creditworthiness.
The short answer is FICO scores, which are the industry standard and relied upon by just about everyone.
There are three FICO scores you need to be concerned with, including one from Equifax, one from Experian, and one from TransUnion, which are the three main credit bureaus.
Know Your Credit Scores Long Before Applying for a Mortgage
Before you actually head out to get a mortgage, it’s good practice to view your credit scores long before you apply. I’m talking several months in advance because any necessary credit score changes/improvements take time.
For example, any mistakes (or legitimate issues) holding your credit score down may take months to get cleared up. And you won’t want to leave anything to chance. Yes, the credit bureaus are bureaucratic, so nothing happens all that quickly.
Also, be sure to go with a service that allows you to see all 3 credit scores, as mortgage lenders typically pull a tri-merge credit report, which includes credit scores from all three bureaus.
The bureaus each report information a little differently, so knowing just one score won’t do you (or your lender) much good.
As far as lenders are concerned, it basically allows them to triple-check your credit before making the decision to hand over a large sum of money. They use the mid-score for pricing/qualification, so it’s imperative that all 3 credit scores are in tip-top shape.
For example, if your credit scores are 650, 680, and 720, a mortgage lender would use the 680 score, which is a decent but below-average credit score.
Lower Credit Score = Higher Mortgage Rate
Put simply, a lower credit score will lead to a higher mortgage rate, and vice versa. This all has to do with risk. The lower your credit score, the higher the chance you’ll default on your mortgage, at least that’s what the statistics say.
So if your credit score is too low, you probably won’t even get approved for a mortgage. Lenders simply won’t want your business. It’s just that risky.
Lately, banks and lenders have become even more stringent, requiring higher credit scores than they have in the past.
Credit Score Below 620 Considered Subprime
As far as conventional mortgage loans go, a credit score below 620 is typically considered subprime, meaning you’ll have a difficult time qualifying for a mortgage, and if you do, you’ll receive a subprime mortgage rate.
In general, you want a credit score above 720 to avoid any negative pricing adjustments, but a 760 credit score might be the new rule if you want the best possible terms and lowest rates. If you’ve got excellent credit, you can even get a reduced mortgage rate.
In summary, your credit score is probably the one thing you have complete control of, whereas things like job, income, and assets can be at the mercy of external forces. So do your best to strive for perfection in order to get the best deal on your mortgage.
Some Useful Credit Tips for Those Shopping for a Mortgage
- Credit scores are the single most important factor in determining your mortgage rate
- Aim for a 760+ credit score to get the best pricing and to avoid scrutiny
- Credit scores aren’t everything, what’s on your credit report matters as well!
- Know the contents of your credit report and what your scores are long before your lender does
- Any mistakes or missteps can be corrected, but take time, often several months!
- The FHA now requires a minimum credit score of 500, or 580 if you put less than 10% down
- Conventional loans generally require a minimum credit score of 620
- Credit scores below 620 are considered subprime and will be priced much higher
- Lenders pull all three of your credit scores and use the median score for qualification
- Low credit scores can also disqualify you for certain loan programs and/or limit your options
- Don’t mess with your credit before or during the loan application process!