What credit score do you need to qualify for a mortgage?
The first thing to keep in mind is that qualifying for a mortgage involves a lot more than just a credit score. While your FICO score is a very important ingredient, it is just one factor. Lenders also look at your income and level of debt, among other things.As a rule of thumb, however, a credit score below 620 will make buying a home very difficult. A FICO score below 620 is considered sub-prime. In the past there were mortgage companies that specialized in sub-prime mortgages. Because of the challenges in the credit market over the last year or so, however, sub-prime loans have become difficult if not impossible to obtain.
A FICO score between 620 and 650 is considered fair to good credit. But keep in mind, this range of credit scores does not guarantee you will qualify for a mortgage, and if you do qualify, it won’t get you the lowest interest rate possible. Still, to buy a home aim for a score of at least 640, recognizing that other factors weigh in the decision and that some banks may require a higher score.
What credit score do you need to get a low rate mortgage?
It use to be that a score of about 720 would yield the lowest mortgage rates available. Today, the best rates kick in with a FICO score of 760. And interest rates go up significantly as your credit score drops. To give you an idea, the following table shows current rates by credit score and calculates a monthly principal and interest payment based on a $300,000 loan
Of course, the interest rates change daily, but the above table gives you an idea of the importance of a high score when you apply for a mortgage
In today's tight economy, more than 25 percent of consumers -- an estimated 43.4 million people -- have a credit score of 599 or below, according to recent numbers released by FICO. "And while the FHA program will write mortgages with the same great interest rates all the way down to a credit score of 580, other low-rate offers will generally require a score of 720 or higher," said Keith Gumbinger, Vice President of HSH.com.
Here's what you can do to raise your credit scores and get on the path to home ownership.
Know how your score works
Your overall credit score is made up of several factors, and each is weighted differently. Since different credit behaviors can have different effects on your score, it's important to know how they works.Here's the breakdown of which factors affect your credit score:
•Payment history (35 percent)
•Amounts owed (30 percent)
•Length of credit history (15 percent)
•New credit (10 percent)
•Types of credit used (10 percent)
Think about how your financial behavior affects your credit score. Do you carry a balance on your credit cards? If so, that hurts your score in terms of amounts owed. If you open too many new lines of credit, mortgage lenders will see you as desperate. Making late payments causes creditors to think you're insolvent. These are all things that will drop your credit score.
"You'll want to review your credit reports six months or more before a large credit event like applying for a mortgage," says Gumbinger. It can take quite some time to clear up any errors or solve legitimate disputes, and you want those things off your report when you fill out mortgage applications.
Even if you're not in the market for a mortgage, you'll still want to review your credit reports at least once each year. You're entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) each year. Stagger receiving the reports, and you'll have a credit update once every four months. You can access your free reports at www.annualcreditreport.com.
Pay on time
"Be extra careful to make each [of] your minimum payments on time each month," says Barry Paperno, product support manager for FICO, inventor of the FICO score. "If you're late making payments now, bring them current immediately and keep them current." Your payment history makes up the largest part of your credit score (35 percent), and it takes longer to raise your score after late payments than it does for some other issues.
Pay down debt
Since the FICO formula looks at your credit card limits and balances, both individually and in total, shifting balances around won't make your bottom line look any better. Instead, you'll want to pay down balances while continuing to use the cards, says Paperno. Ideally, you'll want to aim for a utilization percentage, both individually and in total, of under 10 percent. That means you're using less than 10 percent of available credit on any one of your cards.
Don't close accounts
Length of credit history is another important part of your credit score, so closing old accounts could actually hurt you. That's because potential mortgage lenders want to know you've been responsible with credit for a good long time. Keep older accounts active by making small charges on each one at least every few months and then paying those charges off right away, advises Paperno. "Using your cards regularly keeps them active, which ensures that your credit limits on these cards continue to be open and included in your credit utilization. Contrary to popular belief, you won't be penalized for having lots of available credit.
Resources
Having a good understanding of credit scores can help as you manage your finances. The good news is that in addition to a printer-friendly version of the quiz you just took, many resources are available online that provide valuable information. Download the print version of the quiz and visit the sites below to increase your knowledge about credit reports and credit scores.
To download a printer-friendly PDF version of CreditScoreQuiz.org, click here.
Credit Reporting Companies
The three major national credit reporting companies (CRCs) are: Equifax, Experian and TransUnion. These firms collect information about your borrowing and repayment behavior from lenders and businesses that have extended credit to you. This information is compiled into a credit report. You can obtain a copy of your credit report from each of the three companies for a fee. You are also entitled to a free copy within 60 days of being denied credit from the CRC that supplied the lender with your report.
You may contact each company by clicking their name:
Equifax
Experian
TransUnion
Free Credit Report Once a Year
Consumers can obtain a free copy of their credit reports once a year from each of the three national credit reporting companies at annualcreditreport.com or by calling 1-877-322-8228.
Your credit history is important to a lot of people: mortgage lenders, banks, utility companies, prospective employers, and more. So it's especially important that you understand your credit report, credit score, and the companies that compile that information, credit bureaus. This site--maintained by the Federal Reserve Board--provides answers to some of the most common, and most important, questions about credit.
Your Credit Report
Your Credit Score
Credit Report Errors
Your Credit Report
Q: What is a credit report?
A: A credit report is a record of your credit history that includes information about:
Your identity. Your name, address, full or partial Social Security number, date of birth, and possibly employment information.
Your existing credit. Information about credit that you have, such as your credit card accounts, mortgages, car loans, and student loans. It may also include the terms of your credit, how much you owe your creditors, and your history of making payments.
Your public record. Information about any court judgments against you, any tax liens against your property, or whether you have filed for bankruptcy.
Inquiries about you. A list of companies or persons who recently requested a copy of your report.
Q: Why is a credit report important?
A: Your credit report is important because lenders, insurers, employers, and others may obtain your credit report from credit bureaus to assess how you manage financial responsibilities. For example:
Lenders may use your credit report information to decide whether you can get a loan and the terms you get for a loan (for example, the interest rate they will charge you).
Insurance companies may use the information to decide whether you can get insurance and to set the rates you will pay.
Employers may use your credit report, if you give them permission to do so, to decide whether to hire you.
Telephone and utility companies may use information in your credit report to decide whether to provide services to you.
Landlords may use the information to determine whether to rent an apartment to you.
Q: Where do credit bureaus get their information?
A: Credit bureaus get information from your creditors, such as a bank, credit card issuer, or auto finance company. They also get information about you from public records, such as property or court records. Each credit bureau gets its information from different sources, so the information in one credit bureau's report may not be the same as the information in another credit bureau's report.
Q: How can I get a free copy of my credit report?
A: You can get one free credit report every twelve months from each of the nationwide credit bureaus--Equifax, Experian, and TransUnion--by
visiting www.annualcreditreport.com
or calling (877) 322-8228.
You will need to provide certain information to access your report, such as your name, address, Social Security number, and date of birth.
You can order one, two, or all three reports at the same time, or you can request these reports at various times throughout the year. The option you choose will depend on the goal of your review. A report generated by one of the three major credit bureaus may not contain all of the information pertaining to your credit history. Therefore, if you want a complete view of your credit record at a particular moment, you should examine your report from each bureau at the same time. However, if you wish to detect any errors and monitor changes in your credit profile over time, you may wish to review a single credit report every four months.
Q: Who else is allowed to see my credit report?
A: Because credit reports contain sensitive personal information, access to them is limited. Credit bureaus can provide credit reports only to
lenders from whom you are seeking credit;
lenders that have granted you credit;
telephone, cell phone, and utility companies that may provide services to you;
your employer or prospective employer, but only if you agree;
insurance companies that have issued or may issue an insurance policy for you;
government agencies reviewing your financial status for government benefits; and
anyone else with a legitimate business need for the information, such as a potential landlord or a bank at which you are opening a checking account.
Credit bureaus also furnish reports if required by court orders or federal grand jury subpoenas. Upon your written request, they will also issue your report to a third party.
Q: Does the credit bureau decide whether to grant me credit?
A: No, credit bureaus do not make credit decisions. They provide credit reports to lenders who decide whether to grant you credit.
Q: How long does negative information, such as late payments, stay on my credit report?
A: Generally, negative credit information stays on your credit report for seven years. If you have filed for personal bankruptcy, that fact stays on your report for ten years. Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. Information about criminal convictions may stay on your credit report indefinitely.
Q: What can I do if I am denied credit, insurance, or employment because of something in my credit report?
What can I do if I receive less favorable credit terms than other consumers because of something in my credit report?
A: If you are denied credit, insurance, or employment--or some other adverse action is taken against you, such as lowering your credit limit on credit card account--because of information in your credit report, the lender, insurance company, or employer must notify you and provide you with the name, address, and phone number of the credit bureau that provided the credit report used to make the decision. You can get a free credit report from this credit bureau if you request it within sixty days after receiving the notice. This free report is in addition to your annual free report.
In addition, lenders may use a credit report to set the terms of credit they offer you. If a lender offers you terms less favorable (for example, a higher rate) than the terms offered to consumers with better credit histories based on the information in your credit report, the lender may give you a notice with information about the credit bureau that provided the credit report used to make the decision. Again, you can get a free credit report (in addition to your annual free report) from this credit bureau if you request it within sixty days after receiving the notice.
If you receive one of these notices, it's a good idea to get your free credit report and review the information in it right away. If you think your credit report contains inaccurate or incomplete information, follow the steps in Credit Report Errors below, to try to resolve the issue. For tips on how to improve your chances of being granted credit, or to improve your chances of receiving credit on better terms, read the Federal Reserve's 5 Tips: Improving Your Credit Score.
A: If you are denied credit, insurance, or employment--or some other adverse action is taken against you, such as lowering your credit limit on credit card account--because of information in your credit report, the lender, insurance company, or employer must notify you and provide you with the name, address, and phone number of the credit bureau that provided the credit report used to make the decision. You can get a free credit report from this credit bureau if you request it within sixty days after receiving the notice. This free report is in addition to your annual free report.
In addition, lenders may use a credit report to set the terms of credit they offer you. If a lender offers you terms less favorable (for example, a higher rate) than the terms offered to consumers with better credit histories based on the information in your credit report, the lender may give you a notice with information about the credit bureau that provided the credit report used to make the decision. Again, you can get a free credit report (in addition to your annual free report) from this credit bureau if you request it within sixty days after receiving the notice.
If you receive one of these notices, it's a good idea to get your free credit report and review the information in it right away. If you think your credit report contains inaccurate or incomplete information, follow the steps in Credit Report Errors below, to try to resolve the issue. For tips on how to improve your chances of being granted credit, or to improve your chances of receiving credit on better terms, read the Federal Reserve's 5 Tips: Improving Your Credit Score.
Q: I've been receiving unsolicited credit offers. Why? Can I opt-out of receiving these offers?
A: Credit bureaus may sell the names and addresses of consumers who meet specific credit criteria to creditors or insurers, who must then offer them credit or insurance. For example, a creditor could request from a credit bureau the names and addresses of consumers who have a credit score of 680 or higher and then offer credit to those consumers.
You can have your name and address removed from these lists by opting-out of the listing. This will reduce the number of unsolicited offers you receive. To opt-out, call 888-5-OPTOUT (888-567-8688) or visit www.optoutprescreen.com
. You will need to provide certain information in order to opt-out, such as your name, address, Social Security number, and date of birth.You have the ability to opt-out of receiving offers either for five years or permanently. If you want to opt-out permanently, you will need to fill-out, sign, and mail-in a form. The form is available by either calling the toll-free number or visiting the website.
You can reverse your opt-out decision at any time to start receiving offers of credit and insurance again by calling the toll-free phone number or visiting the website.
Q: What can cause my credit score to change?
A: Because your credit score reflects the information in your credit report, changes to your credit report may cause your credit score to change. For instance, if you pay your bills late or incur more debt, your credit score may go down. However, if you pay down an outstanding balance on a credit card or mortgage or correct an error in your credit report, your credit score may go up.
Q: How can I get my credit score?
A: In some cases, a lender may tell you your credit score for free when you apply for credit. For example, if you apply for a mortgage, you will receive the credit score or scores that were used to determine whether the lender would extend credit to you and on what terms. You may also receive a free credit score or scores from lenders when you apply for other types of credit, such as an automobile loan or a credit card.
Joel Lobb (NMLS#57916)3
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