One of the biggest purchases you will ever make is likely to be a house. However, since most people can't just plunk down hundreds of thousands of dollars in cash, a mortgage is usually required. When you get a mortgage, the bank pays for your house, and then you repay the bank with interest.
Since the bank is taking a big risk by lending you a great deal of money, it is little surprise that your reliability is going to be questioned. One of the ways that lenders determine the likelihood that you will repay a loan is by looking at your credit score.
While there are many different credit scoring models, one of the most commonly used models for mortgages is the FICO score. The scale runs from 300 to 850, and different factors are weighted in order to come up with your score.
What Credit Score is Needed for a Mortgage?
In many cases, you can get a mortgage even with a relatively low score. Some lenders will qualify you for a mortgage with a score as low as 580. However, you have to pay for the fact that you are a perceived default risk with a score that low. You will likely need to provide extra documentation in order to prove that your income can handle the payments, and you will be charged a higher rate of interest to help offset the risk the lender is taking.
Borrowers who want the best possible rates on their mortgages need to work toward higher credit scores. In order to qualify for the best financing terms, you need a FICO score of at least 740. And, even if you have that high of a score, if you have a high debt-to-income ratio, or if your credit report throws up other red flags, you might still have to pay a higher interest rate or qualify for a smaller loan that you had hoped for.
Most borrowers, though, can get a reasonably competitive rate with a credit score of about 680. The rate won't be the best available, but it’s also usually not too high.
The general rule of thumb for mortgages is this: The higher your FICO score the better. While other factors will be taken into consideration when qualifying you for a mortgage and setting your terms, your credit score is the first thing lenders look at, boosting it to at least 680 is a good idea.