Do you have a high enough credit score to get a mortgage?
One of the things every lender looks at when you apply for a loan is your credit score. Your credit score reflects how well you manage your debt based on your repayment history, outstanding balance, and other factors. Recent data from the Federal Reserve showed 90% of US mortgages were issued to borrowers with a score of 650 or higher. Further, 75% of US mortgages were issued to borrowers with a score of 700 or higher.
The FICO® credit score ranges from 300 to 850 and is based on data analyzed by the three major credit-reporting bureaus, Experian, Equifax, and TransUnion. According to Experian, 67% of Americans have a good or better credit score. Broken down further, Experian’s data shows:
- Very Poor (300-579) 16%
- Fair (580-669) 17%
- Good (670-739) 21%
- Very Good (740-799) 25%
- Exceptional (800-850) 21%
Credit scores vary by age as well. Since length of credit history and total credit usage influence the score, a younger home buyer with student debt will probably have a lower score than an older buyer who has responsibly paid down their debt over the years. In December 2018, the national average credit score was 704, while the average credit score for 18-to-29-year-olds was 659.
A lower credit score will not necessarily disqualify you from getting a mortgage or other loan, but it may limit the total loan amount you can take out or impact your interest rate. The minimum credit score for loans backed by Fannie Mae and Freddie Mac is 620. The Federal Housing Administration (FHA) will accept credit scores as low as 500 if you put down at least 10% for the down payment.
To improve your credit score before applying for a mortgage or other loan, you need to understand what impacts your credit score. The credit score is influenced by five differently weighted factors including payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Improving and maintaining your credit score can be as simple as limiting your credit usage and paying your bills on time. Some factors take time to build like length of credit history and your credit mix. Opening several new accounts at once will not have the same impact as gradually opening and maintaining accounts over time.
Mortgage professionals recommend you start improving your credit score at least six months to one year before applying for a mortgage. If you have any questions about your credit score, please let me know.
Sources: Experian, Money.com