Considering making the leap to homeownership? There’s more to think about than the curb appeal of those homes you’re eying—the health of your credit score tops the list. To many, a credit score seems like a random trio of numbers determined by a complicated algorithm, but it represents much more to a lender who’s considering whether to approve your mortgage loan. Although you may not need a perfect credit score, it’s important to know what you can do to improve your numbers. A low credit score can indicate you’re a risky borrower, while a high score can significantly upgrade the mortgage terms you’re offered. Here, Trulia.com discusses credit scores and suggests some steps you can take to improve your chances of landing a home with manageable loan terms.
What’s the minimum credit score for a mortgage?
The minimum credit score required to receive a loan depends in large part on the type of loan you’re considering. FHA loans have some of the lowest credit score requirements, at 580 with a 3.5 percent down payment. However, that doesn’t take other applicants out of the running; FHA lenders allow lower scores with a down payment of 10 percent or more. Veterans Affairs (VA) loans are a bit trickier. While the VA doesn’t have a minimum credit score requirement, VA lenders do—and that number varies by lender. Some lenders require a score of 620, while others might be at 640. The good news? Getting a “no” from one lender doesn’t mean you’re out of luck. For conventional loans, most lenders will look for at least a 620 credit score. Ideally, however, applicants would need to have a 660 credit score to land a better rate and avoid jumping through additional hoops.
What is a good credit score?
Beyond approval for a mortgage, the range your credit score falls in can drastically change the interest rate you can lock down—and the amount you’ll pay in private mortgage insurance (PMI), if applicable. For instance, the approximate difference in rates for a conventional loan with a 680 credit score versus a 740-plus credit score could be 0.25 to 0.0375 percent. But the PMI premium in this scenario would double. The perfect credit score would be 760 or higher, unless you’re able to put down 20 percent and skip the PMI, in which case a score of 740 or more would suffice.
How to improve your credit score
Whether your score is too low to secure a mortgage or you’d rather use available funds to fix your financial situation (rather than putting it toward a larger down payment), there are steps you can take today to start improving your credit score right away. Many credit score problems are the result of a high credit utilization ratio (debt that is high in comparison to the credit available.) Many experts use the 30 percent rule of thumb: Charges to your credit card shouldn’t exceed 30 percent of your available credit limit. It’s important, because this factor alone comprises 30 percent of your credit score. One of the easiest ways to improve your score is to pay down credit card debt, keeping this ratio in mind.Another huge factor in the health of your credit score is your payment history, or your ability to make on-time payments to your creditors. If you see a recent late payment on your report, one solution is to talk to the creditor and ask for a deletion. While this likely won’t work for a serial late-payer, it could be granted for a one-time offender. If the creditor agrees to the deletion, they will send a letter to the credit bureau requesting that the negative information be removed from your report. Although these fixes normally take a month or two to be reflected in your credit score, your lender can speed up the process by doing a rapid rescore. This requires gathering up pertinent documents to show the changes made—like a new credit card statement or letter of deletion—and using the lender’s credit company to request an updated score from the credit bureaus. This could lead to an updated score in days instead of months, which can make all the difference when you’re trying to get pre-approved for a home loan in a competitive market.