Navigating the world of mortgages can often feel like decoding a secret language, especially when it comes to understanding credit scores. If you’ve been wondering about the intricacies of credit scores and how they impact your mortgage approval, you’re in the right place. Let’s dive deep into the world of credit scores and how they play a crucial role in your journey to securing a mortgage.
1. The Role of Credit Scores in Mortgage Approval
The majority of lenders use a FICO credit score from Equifax to assess your mortgage eligibility. However, it’s essential to know that there are multiple credit scores on a credit bureau. The score you see when you check personally (ERS 2.0 score) may differ from the FICO score obtained during a professional (hard) credit check, as they are calculated using different algorithms. Remember, mortgage lenders primarily use Equifax, so ensure you’re looking at the right score.
2. Where to Check Your Credit Score
If you’re unsure about your credit score, consider purchasing a report from Equifax or obtaining a free copy from sites like Borrowell.com. These personal scores are usually accurate within 50 points of your official FICO score.
Understanding Different Credit Score Ranges for Mortgages:
- 680 and Above: This score opens the door to almost every lender in the market, allowing for the best option to secure the lowest interest rate.
- 650 and Above: The minimum score for $0-down mortgages and for borrowed down payment mortgages where you can obtain the funds from a personal line of credit.
- 600 and Above: This is the absolute minimum score for a 5% down payment mortgage. The lenders will review files on a case-by-case basis for approval due to the lower score.
- 500 and Above: You’ll need at least a 20% down payment and will likely need to use an alternative or even private lender.
- Below 500: Expect down payments as high as 35% through either a private lender or an alternative lender.
3. Improving Your Credit Score
- Focus on Utilization: Utilization, or the percentage of your credit line being used, is crucial. Keeping your credit utilization below 50% can positively affect your score. Pay down over-limit credit lines first for maximum effectiveness.
- Balance Across Credit Lines: Aim for even utilization across all credit lines, rather than maxing out one while leaving another barely used.
- Patience Is Key: It can take up to 45 days for these changes to reflect on your credit report, depending on your credit reporting cycle.
- Learn More: If you want to learn the quickest and most effective ways to increase your credit score, then click here to read my post on how to improve your credit score for a mortgage.
4. The Importance of Credit History
Even with a credit score above 650, you could get declined for a mortgage due to insufficient credit history. Lenders need to see that you’ve managed credit responsibly over time. Follow the “2-2-2 Rule”: at least 2 credit lines, 2 years of history, with a minimum limit of $2,000 on each.
Types of Credit
- Revolving Credit: Includes credit cards and lines of credit; essential for showing active credit management.
- Installment Credit: Fixed payments, like car or student loans, show ability to manage long-term debts.
- Open Credit: Typically paid in full each month, like phone bills. Ensure these are always paid on time.
- Mortgage Credit: Not necessary for a great score, but crucial never to miss a payment.
Non-Reporting Items
Some bills like utilities might not appear on your credit report, but defaulting can lead to collections that will.
Conclusion
Understanding your credit score and its impact on mortgage approval is a crucial step in your home buying journey. Whether you’re already in a good place or need to work on improving your score, remember, every financial situation is unique. Seeking advice from a mortgage professional can provide you with a clear roadmap tailored to your circumstances.
Ready to explore your options? Let’s connect and find the right mortgage solution for you.
