For most people in the United States, buying and owning a home typically means borrowing money from a mortgage lender. Banks and financial institutions that lend money to homebuyers always check applicants’ credit scores to ensure they’re good candidates for repayment throughout the loan.
In other words, having a healthy credit score is very important if you want to be approved for a mortgage. Use this handy explainer to find out what you need to know about credit scores if you plan to purchase a home:
What is a Credit Score?
A credit score measures your likelihood of paying back a loan on time. It is usually represented by a number between 300 and 850.
It’s common for credit scores to be slightly different from one reporting source to another. For example, your credit card may report a score that’s a little higher or lower than a free credit monitoring service, depending on when you check it.
Who Maintains and Measures Credit Scores?
According to Bankrate, two primary credit scoring models exist: FICO® and VantageScore. While the differences between the two are minimal, it’s important to keep an eye on both.
For example, FICO primarily accounts for a person’s payment history. On the other hand, the most important factor in a VantageScore rating is someone’s credit card balances and how much credit they use compared to how much is available to them (credit utilization ratio).
How is a Credit Score Calculated?
Credit scores use proprietary measurements based on several factors, including your credit history, current credit use, debt, credit utilization ratio, whether you make payments on time, how long you’ve had loans open and active, and more.
According to the Consumer Financial Protection Bureau (CFPB), scores are calculated at different times based on credit report data availability, when data is updated, and the scoring models themselves.
What is Considered a “Good” Credit Score?
FICO credit scores break down into the following ranges:
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Exceptional: 800-850
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Very Good: 740-799
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Good: 670-739
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Fair: 580-669
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Poor: 300-579
Meanwhile, VantageScore credit scores are organized in the following categories:
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Excellent: 781-850
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Good: 661-780
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Fair: 601-660
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Poor: 500-600
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Very Poor: 300-499
Where to Find Your Credit Score
Many credit card companies and lenders offer credit reporting tools as part of their services. You can also check your score by signing up for services like Credit Karma, which permits you to check your score 24/7, 365 days a year.
Additionally, anyone with a credit history is entitled to a free credit report every 12 months from the major credit bureaus, so keep an eye on these reports every year.
What Credit Scores Do You Need to Get a Mortgage?
With that said, different loan programs have different requirements and preferences for buyers and their credit scores. The most common loan types include:
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Conventional: Credit scores must be at least 620 (though many lenders prefer 680+).
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FHA: Backed by the Federal Housing Commission (FHA), credit scores for this type of loan must be at least 580 (though 640+ is preferred).
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VA: For this loan type administered by the Department of Veterans Affairs (VA), buyer credit scores should be at least 640 (preferred).
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USDA: Administered by the United States Department of Agriculture (USDA), preferred credit scores should be at least 680.
How Your Credit Score Can Impact Your Homebuying Purchase
Because a credit score is a measurement of your likeliness to pay back a loan, it’s essential to the homebuying process.
Lenders may be more hesitant to let you borrow money if your credit score is low, which could mean that your interest rate is higher than you expect. On the flip side, if you have a stronger credit score, there’s a better chance you’ll get a preferable rate from the lender.
What You Can to Do Improve Your Credit Score
There’s no “secret” to improving your credit score. It can take time, but there are a few steps that can have a positive impact on your credit score, including:
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Stay on Time with Payments: If possible, don’t miss any credit card payments. This lets lenders know that you’re timely and reliable.
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Pay Down Debt to Reduce Your Credit Use: Pay off high debts on credit cards and personal loans.
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Keep Old Accounts Open: The length of your credit history is not an insignificant factor in your credit score, so keep your old credit cards open and use them every once in a while.
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Avoid Large Purchases: Paying for anything in installments, especially if it requires a credit check, can negatively affect your credit score.
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Avoid New Loans: New loans can impact your credit score as well.
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Dispute Inaccurate Credit Report Info: If you see something fishy on your credit report, don’t be afraid to report it.
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Keep an Eye on It!: While checking your credit score frequently won’t improve it, you will at least be able to see your progress over time to make sure you’re hitting your goals.
Want to learn more about the homebuying process? Check out our First-Time Homebuyer’s Guide to discover the ins and outs of the process!
