Your Credit Score and Getting a Mortgage
Having a good credit score and getting a mortgage go hand in hand. We’ve gathered a few FAQs to help you better understand why.
How good does my credit score need to be to get a mortgage?
Typically, most lenders require a minimum credit score of 620 after pulling a tri-merge credit bureau consisting of Transunion, Equifax and Experian.
Will I get the best rates with the minimum 620 credit score?
No, mortgages are priced under Fannie Mae guidelines. A credit score of 740 or higher will get the best pricing and qualifies for most lenders’ best rates.
What makes up a credit score?
Credit scores are a mathematic formula that attempts to quantify all of your financial activity, history and situation into a single number.
One of the most ubiquitous figures is the “FICO” score, developed by the Fair Isaac Corporation. The factors that comprise your FICO score (and the weight given) are your payment history (35%), the amount of debt you have (30%), the length of your credit history (15%), the type of credit you have (10%), and the amount of new credit you have (10%). You can obtain your FICO score directly from the various credit bureaus, along with many credit cards which offer that service as well. Many services and websites claim to offer a free credit score or report but the offer is often a teaser to get you to sign up for expensive and unnecessary credit monitoring services. You can also find an estimate of your score for free through ad-supported sites like Credit Karma.
How do I keep my credit score high – 740 and above?
A good credit score is a double-edged sword: It allows you to get access to more credit (and at more favorable terms). However, if you don’t manage the credit responsibly, it can get you in a money hole and clobber your credit score.
Very healthy credit habits can not only keep your score from falling but maybe even raise it a few notches which can make a world of difference in applying for a mortgage. Here are four healthy credit habits:
Make it automatic – If possible, arrange to have minimum monthly payments sent automatically from your checking account to your lenders. You can always (and should, eventually) pay down your balances when you have more cash readily available.
Keep the balances low – Try not to charge more than a third of your credit card’s limit. For example, if you have a card with a $3,000 limit, don’t carry a balance of more than $1,000.
Don’t get cards you don’t need – That discount associated with a card issued by, for example, a big box retailer, usually isn’t worth having one more account showing up on your credit report.
Don’t shuffle your cards – Stay with one credit card provider unless you find a much better deal somewhere else. Even then, you may want to keep the original account open as well, even/especially if you won’t charge anything on that account.
What if I have a bad credit score or limited credit – will I be doomed for a lifetime of higher rates?
Unless you have borrowed money in the past (and promptly paid it back), you may not have as high of a credit score as you would like. So, the first step to getting a score is to get a loan or credit card and then prove you can handle the debt and payments responsibly.
Start by talking to your local bank or credit union to see if they offer a traditional credit card or perhaps a small ($500 or less) personal loan.
You may need to start with a card that is either co-signed by your parents or perhaps, established by your parents with you on the account and with user privileges.
As soon as you use the credit card or money from the loan, make sure you make your minimum payments on time until the balance is paid off.
You should see your score improve enough to get approved for a loan for a higher dollar amount or a credit card with a higher limit. Again, make timely payments and pay the borrowed money back as soon as you possibly can.