If you’re like most homeowners out there, you’re probably wondering if you can take advantage of the record low mortgage rates currently on offer – the same goes for aspiring homeowners.
Unfortunately, the super low interest rates have been met with tighter underwriting guidelines, as banks and mortgage lenders have had to make some adjustments in the risk department.
Credit Score Requirements Have Risen
Credit scoring requirements have risen as a result, sending more mortgages to only the most creditworthy borrowers.
But you can still get a mortgage without pristine credit. Heck, the FHA has a minimum credit score requirement of just 500, though individual banks that offer FHA loans typically have a credit scoring floor.
In other words, you can have really poor credit and still get approved for a mortgage, which is somewhat amazing given the ongoing crisis surrounding mortgage lending.
If anything, it seems a bit irresponsible, but of course there will be cases where a borrower may be an ideal candidate for a mortgage despite making some financial missteps in the past.
Credit Scores Below 620 Can Cost You
Generally speaking, a credit score south of 620 is considered a bad credit score, or subprime (Fico score range), meaning it’ll be difficult to obtain financing, but if you are able to, you’ll be paying a premium in the form of a higher mortgage rate.
You may also have to come in with a larger down payment, or reduce your desired loan amount to get approved. For example, the FHA requires a minimum Fico score of 580 to qualify for their 3.5% down mortgage program.
And certain transactions like cash out refinances may also be limited.
A credit score between 620-680 is considered Alt-A, meaning your credit is less than satisfactory, but still good enough to secure financing in most cases, assuming other things are in place, like a steady job and healthy, verifiable assets.
Credit scores between 680-720 are generally good enough to qualify for most home loans and may even come with a pricing rebate, meaning a lower interest rate for you on your mortgage.
While this is true, it doesn’t mean everyone out there qualifies for a record low mortgage rate.
The low, low mortgage rates you see advertised on television and elsewhere always assume you have an excellent credit score.
In other words, 720 and above, or even 760 and above in some cases.
I recently came across a credit score table from Fico®, the inventors of the Fico score, which illustrates the difference in mortgage rate at different credit scoring levels.
As you can see, a credit score between 760-850 qualifies for the lowest rate, which is a rather arbitrary 3.954% APR (I say arbitrary because a bunch of other factors affect mortgage rates as well).
But we can still pull some value out of this table by looking at the other credit scores and associated mortgage rates.
For example, if your credit score is 620 (what I consider a bad credit score), your mortgage rate shoots up to 5.543%.
That’s more than one-and-a-half percentage points – on a $300,000 loan amount, the difference in monthly payment is nearly $300!
So always be sure to check your credit report months before even thinking of applying for a mortgage to avoid any unexpected surprises and unnecessary rate increases.
Remember, the difference between a good credit score and a bad credit score could be enough to kill your hopes of getting a mortgage altogether!
760 Credit Score Seems to Be the Magic Number
If your credit score is above 760, you’ll likely qualify for all types of mortgages, from conforming to jumbo loan amounts, high loan-to-value loans, and so on, at the lowest possible interest rates.
I’ve even seen special rebates for borrowers with credit scores above 760, so never underestimate the importance of your credit score, even if you think it’s already as high as it can be.
All that said, remember that a credit score is just one factor in the mortgage approval process. Without rental history, a steady job or verifiable assets, you may be out of luck even with an excellent credit score.
In summary, there’s no universal credit score that a mortgage lender will ask for – it will vary from bank to bank, and from loan program to loan program, so keep that in mind while shopping for a home loan.
It is very, very important that you know your credit scores long before even thinking about applying for a mortgage. And you need to know all 3 credit scores because mortgage lenders pull tri-merge credit reports, and then use the median credit score to make their underwriting decision.
If you fail to check your credit early on, you’re basically gambling that you’ll have good credit, which could cost you a mortgage approval, or lead to a substantially higher mortgage rate. That could result in thousands of dollars being thrown away unnecessarily.