What credit score do I need to get a mortgage?
People ask me, “What credit score do I need?,” more than nearly any other question. The common assumption is that there is one number a borrower’s credit score must be above to obtain a mortgage and to get a good rate. This week on Mortgage Mythbusting I want to explain the truth: there is no exact credit score required.
What determines my Credit Score?
First a little background, the Fair Isaac Corportation (FICO) collects your financial information from the three major credit bureaus. Their software analyzes your credit history and determines your FICO score (commonly known as your credit score). Your score can range from 300-850, the higher the score, the better. Five factors determine your score, to varying degrees shown in the chart below.
- Payment history: The most important element in determining your score is if you paid your past credit accounts on time.
- Amounts owed: Owing high amounts does not lower your score. The percentage of the credit you are using that you have available matters the most. Creditors assume the closer you are to your credit limit, the more likely you are to miss a payment.
- Length of credit history: A longer credit history is generally better. Also, how long your accounts have been open and how long since you last used them.
- The credit mix in you use: Creditors consider a mix of credit best– installment (loans such as car, student, etc) and revolving (credit cards).
- New credit: Opening several new accounts in a short period of time will lower your score.
Your credit score is not the sole determiner of your eligibility for a mortgage and interest rate. As I discussed here, your down payment is also a component. A higher down payment (20%+ of purchase price) may offset a lower credit score.
The mortgage loan program you apply for is also a factor. FHA and VA loans generally have lower required credit scores than conventional loans.
The Bottom Line on Credit Scores
Talk to a mortgage lender to learn how your credit score will influence your mortgage loan eligibility and rate. I welcome the opportunity to discuss with you your specific financial goals and help you pursue your dream of home ownership. Please contact my team to get started.