The better your credit score, the better your interest rate will be when you secure a mortgage. The closer your credit score is to the fair credit threshold, the higher your interest rate will be when you get a home loan. Banks set your interest rate based on how much of a risk they think lending you money could be to them. If you’re too much of a bad risk, there is a chance they won’t give you any money at all. If you’re a good bet, they won’t charge you as much to lend you the money you need to buy a home.
What’s the Minimum Score to Get a Mortgage?
Every lending institution has its own set of rules. Standard credit score ranges for loan approval start at 620, which is in the upper echelon of the fair credit score range. Scores between 670 and 739 are good enough to easily secure a mortgage, but the rates won’t be the best. Anything above 740 is very good or excellent, and you’ll get quick pre-approvals and prime interest rates.
Major banks won’t give a mortgage to anyone with a credit score under 620, and neither will Fannie May or Freddie Mac. When you turn 18, you have a credit score of around 631. The money decisions you make after that point change it for better or worse. Be very careful before you agree to sign on the dotted line for student loans, credit cards, and auto loans because a high debt-to-income ratio can make it difficult to secure a mortgage later on down the road. If you don’t make payments on time, it’s even harder.
How Can You Improve Your Credit Score?
Banks want to know that you can stay in the same job and home for at least a year. They also want to see you paying your utility bills, phone bills, car notes, and rent on time for an extended period before they’ll lend you enough money to purchase a home. Mortgages are a huge responsibility. You have to prove you can handle it, and the best way to do that is to build your credit. How do you do that? By borrowing smaller sums of money and paying it off on time.
Credit cards aren’t for the undisciplined. If you choose to build your credit using one, be very careful that your bills are paid on time every time. If not, the interest rate can skyrocket from 0% to 25% or higher overnight and your credit score can plummet by 20 points or more from one late payment alone. Make sure that you have the money in your bank account to cover the cost of whatever you purchase on a credit card and pay it off as soon as you can.
On the other hand, if you handle a credit card well, they can build your credit quickly and offer great perks like sky miles and cash back rewards. Be prepared if you haven’t used credit cards in a few years, though. The first time you spend money, it can make your credit score fall by 20-30 points. If you make your payment on time, it’ll come right back up and then some.
Get Advice From Expert Lenders
Preparing to buy a home is stressful, and the advice of an experienced lender can be invaluable. The Potempa Team at One Trust Home Loans has more than 25 years in the lending business and can answer any questions you have. Make an appointment to speak with a lender, and we can help you apply for mortgage pre-approval when the time is right.