What Credit Score Do I Need for a Mortgage? | CreditShout

What Credit Score Do I Need for a Mortgage?

By Kevin / January 12, 2012
What Credit Score Do I Need for a Mortgage?

If you’re in the market for a new home, odds are that you’ll need to borrow at least some money to get that home. Therefore, you’ll have to take out a mortgage. Whether you qualify for a mortgage, and what interest rate you get, are largely dependent on your credit score.

So, what credit score do I need for a mortgage?

With the economic mess that we’re currently in and the housing disaster, getting a mortgage is much more difficult today than it was just a few years ago. Back in the mid-2000s, a social security number and proof of employment had you well on the way to getting a mortgage. Now, things have changed.

Lenders are paying more attention to credit scores than they did in the past. With the economic turmoil in the US, they are being more selective with their customers. In other words, a low credit score will jeopardize your dreams of getting a new home, as you may not qualify for a loan at all.

With this in mind, you may wonder what credit score you need for a mortgage. Let’s take a look at the answer to this question and some other factors that may help you along the process of purchasing a home.

What is the Minimum Required Credit Score for a Mortgage?

This is a tricky answer, as there really is no set minimum that you must have. However, most experts indicate that a score of at least 620 is required, so that is a good starting point.

There is at least one exception to having a score of at least 620. According to homebuyinginstitute.com, Wells Fargo considers issuing mortgages to those with credit scores of 500 or above. So, if your score is in the 500 to 600 range, you may wish to pursue a mortgage with Wells Fargo.

So, the minimum score to qualify for a mortgage is going to be at least 500 at any financial institution that I know of. However, there is no regulated score to speak of, so a bank could lower the bar at any time.

What is a Good Credit Score?

The experts vary on this, but many conclude that 750 or above will result in favorable rates. Credit.com lists scores in the 750 to 800 range as “Very good” and above 800 as “Excellent.” In other words, if you go into a bank with a score of 750 or above, you can expect a competitive rate.

What is a Good Credit Score for a Mortgage?

It’s safe to say that, if you walk into a bank with credit score of 530, you’re chances of getting favorable terms on a mortgage are just about none. They’ll probably view you as a higher risk than most of their customers and consider not lending to you at all.

In general, the higher the credit score, the better the terms will be.

A strong credit score will give you access to the best available rates and terms that are out there. As a result, you’ll save tends of thousands of dollars over the life of your mortgage (in most cases) if you have a high score versus if you have a low score.

How Your Credit Score Will Impact Your Rates

We’ve discussed your credit score in relation to mortgages. Now, let’s take a look at real world examples of how your score would impact your mortgage rates.

The rates vary largely based on credit scores. Also, they may vary by location, but not by much these days. Someone living in Charlotte may get a better deal than someone living in Nashville and vice versa, but moving for mortgage rates alone probably isn’t the best thing in the world to do.

So, let’s take a look at the following situations. The city is listed along with the lowest available APR (as posted by Bankrate.com) and the estimated monthly payment (as posted by Bankrate.com). The following assumptions were used:

  • Amount – $250,000
  • Length – 30 years
  • Down payment – 20 percent ($50,000)
  • Credit score – 710
City APR Estimated Monthly Payment
Boston,MA 3.778% $1,158
Charlotte, NC 3.756% $1,158
Dallas, TX 3.778% $1,158
Minneapolis, MN 3.778% $1,158
Phoenix, AZ 3.760% $1,158

Now, let’s see what a seemingly minor change in your credit score would do to your mortgage.

Suppose that you pay a few bills late and your score drops from 710 to 670. Using the above data, this is how your score would be impacted:

City APR Estimated Monthly Payment
Boston,MA 4.189% $1,212
Charlotte, NC 4.006% $1,194
Dallas, TX 4.189% $1,212
Minneapolis, MN 4.189% $1,212
Phoenix, AZ 4.189% $1,212

Now, suppose that you went in the other direction, instead. Maybe a few things fell off of your credit report or maybe you’re just making great decisions left and right. In any event, your score rises from 710 to 750. Here is how this would play out:

City APR Estimated Monthly Payment
Boston,MA 3.776% $1,158
Charlotte, NC 3.756% $1,158
Dallas, TX 3.689% $1,140
Minneapolis, MN 3.769% $1,158
Phoenix, AZ 3.753% $1,158

Notice a pattern?

No matter where you are located, you are going to qualify for about the same rate that you would anywhere else with a particular credit score.

Thus, while you may be able to save on the actual cost of a home by relocating, your credit score will be important in any location. Sadly, the only real way to get away from it is to avoid debt altogether – a tough proposition for a home buyer.

Also, notice that the estimated monthly payment doesn’t change much (or at all) when your credit score rises, which tells me that it is a sellers market for banks. The payment does change when your score drops, which tells me that the banks are jittery about lending to anyone who doesn’t have a strong credit score.

Now, as for how fluctuations in your credit score will affect the amount you pay, below is a table that illustrates the total that you’ll pay in each of the mentioned cities at each credit score:

City Score of 670 Score of 710 Score of 750
Boston,MA $436,320 $416,880 $416,880
Charlotte, NC $429,840 $416,880 $416,880
Dallas, TX $436,320 $416,880 $416,400
Minneapolis, MN $436,320 $416,880 $416,880
Phoenix, AZ $436,320 $416,880 $416,880

In this example, you stand to save nearly $20,000 (in most cases) by moving from an average credit score (670) to a very good credit score (750).

That may not seem like a lot of money, but that is what many people take home in a year. Think of increasing your credit score as a means of saving a few months or even a year’s salary.

How Can I Raise My Credit Score?

If you do not qualify for a mortgage or would like better terms, consider raising your credit score. Yeah, this sounds like a pain – and it is – but it’s a good bet if you have to borrow money.

According to Forbes, credit card companies wait until just before your bill is due to calculate your credit score. They do so because that is when your debt-to-credit ratio tends to be highest – and they can charge you a higher APR based on your lower credit score.

To beat this, according to Forbes, the best way is to pay off your bill, wait a month and put a small charge of 5 percent of your credit limit on your card. Visit your loan office shortly after doing this and your score should be higher.

If this doesn’t work, consider visiting a financial counselor. The credit scoring business is far too tricky for all but the most qualified professionals to fully understand, and the fee for hiring a professional should be well worth the savings that you’ll get.

Conclusion

Buying – or even attempting to buy – a new home is a long, frustrating process. Unfortunately, your credit score will be there to haunt you if you have had credit problems or just have (perhaps responsibly) avoided using credit in the past.

So, it’s best to keep your credit score high and, once you get that loan, remember not to take on any unnecessary debt. After all, do you really want to fight this battle again?!

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