When you apply for a mortgage, your lender will review your credit history to determine whether you qualify to buy a home. This process also includes pulling your credit scores from the three major credit reporting bureaus: Equifax, Experian, and TransUnion. The majority of lenders use FICO scores to make decisions, so that’s the basis for this post.
There are five factors that determine your credit score, and your payment history carries the most weight. That’s why it’s critical to consistently pay your bills on time, especially when you’re ready to apply for a home loan. Here’s a breakdown of each credit score component.
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Scores and mortgage rates
Credit scores range from 300 to 850 and help lenders determine how risky a borrower you’re likely to be. The higher your credit score, the more creditworthy you are, and the better your chances of mortgage approval.
Your credit score not only makes or breaks your approval, it also affects your mortgage interest rate. A higher score may get you a better rate and save you money on your mortgage.
As of April 11, 2022, most conventional lenders allow a minimum 620 credit score, which comes with average interest rates around 6%. On the other hand, homebuyers with at least a 760 credit score may qualify for a rate around 4.5%.
Currently working on your credit? You may qualify for an FHA loan, backed by the Federal Housing Administration. Your score can go as low as 500, but you’ll need a bigger down payment, at least 10% to compensate for being a riskier homebuyer in the lender’s eyes. With a score of 580 or higher, you need at least a 3.5% down payment.
Looking to build your credit and score? Check out this NerdWallet resource to get started.