Credit Score Impacts A Mortgage
Simply put, a credit score is a three-digit number that indicates a person’s likelihood of paying back a loan. This number is derived from a variety of information in a person’s credit report, including their bill-paying history, current unpaid debt, number and type of lines of credit, previous foreclosures or bankruptcies, among other factors. The most common credit score is the FICO®️ score, which is supplied by data analytics company Fair Isaac Corporation. Average credit scores range between 300-800, with higher scores indicating preferred credit behavior over time.
When considering a mortgage application, banks may consider three separate FICO®️ scores, each from a different credit bureau (Equifax, Experian, and TransUnion). If all three scores are different, a bank will typically consider the median score of the three. If spouses or partners are applying for a mortgage together, a bank will usually calculate the median of both person’s FICO®️ scores and use the lowest score to determine the interest rate for the mortgage.
The impact of a credit score on a mortgage application depends on the type of loan. An ideal credit score for a conventional mortgage is 760 or above, but a credit score of 620 is generally accepted. If a credit score is between 500-600, a Federal Housing Administration (FHA) loan is probably most appropriate. VA loans, which are guaranteed by the Department of Veterans’ Affairs, also tend to have lower acceptable credit scores than conventional loans. Jumbo loans, however, require a credit score of at least 700.
Beyond approval for the mortgage, credit score can also affect its interest rate. A higher credit score generally helps people secure a lower interest rate, translating into long-term savings. Additionally, higher credit scores also will qualify a borrower for a discount in private mortgage insurance (PMI), if required under loan terms.
PRMI can help you navigate through all of these complexities and more to understand which type of mortgage will best fit your personal circumstances and credit score. For tips on how to improve you credit score, see this previous blog post. If you have questions about the impact of your credit score on your dream of buying a home, contact us and we’d be happy to talk to you.
PRMI – Great Lakes has been helping clients purchase homes since 1998 and is backed by one of the most established mortgage lenders in the county with a nationwide presence. We offer a variety of loan programs and service the greater Wooster, Ohio area – including 17 nearby counties. Are you looking for a trusted lender? Contact us by phone at 866.888.7902.
*Opinions expressed are solely my own and do not express the views of my employer.
Sources:
https://www.forbes.com/advisor/mortgages/credit-score-to-buy-a-house/
https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/
https://www.cnbc.com/select/which-credit-score-used-when-applying-for-mortgage/
FICO® is a registered trademark of Fair Isaac Corporation.
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