If you’re thinking about purchasing a new home or refinancing, you should know that your credit score is hugely important.
Why? Well, banks and mortgage lenders use your credit score(s) to evaluate your creditworthiness, which translates to a higher or lower mortgage rate, or even outright eligibility.
Lower Credit Score Equals Higher Mortgage Rate
Put simply, a lower credit score will lead to a higher mortgage rate, and vice versa. And if your credit score is too low, you probably won’t even get approved for a mortgage.
Lately, banks and lenders have become even more stringent, requiring higher credit scores than they have in the past.
FHA Minimum Credit Score
For example, there is now a minimum credit score of 500 on FHA loans. In the past, there was no minimum.
Now, a 500 credit score is pretty dismal, but many individual banks require higher-than-minimum credit score for FHA financing that better suit their own risk appetite, such as a 600 credit score.
Though Wells Fargo recently lowered its credit score requirement on FHA loans after some public pressure.
But if you want to qualify for the FHA’s flagship 3.5 percent down program, you need at least a 580 credit score, otherwise you’ll be stuck putting at least 10 percent down.
Below 620 Credit Score 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, 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.
If you’ve got excellent credit, you can even get a reduced mortgage rate, so it’s always recommended to strive for the best.
And though credit scoring is just one of the many criteria used to judge your borrowing capacity, it’s impacts how much you can borrow, your max loan-to-value ratio, and what you can do (cash-out refinance vs rate and term refinance).
Know Your Credit Scores Long Before Applying for a Mortgage
So if you’re in the market to get a mortgage, it’s good practice to view your credit scores long before you apply. I’m talking months because any necessary changes/improvements take time.
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.
They then take the mid-score, so it’s imperative that all 3 scores are in top shape.
If you have additional questions about credit (click here) and anything related to real estate, send me an email and i’ll be happy to answer you.