Your credit score plays a big part in your mortgage journey. Not only do they impact your ability to qualify for a loan, but they can also impact the interest rate and costs of that loan.
Lenders use your credit score, among other factors, when determining your interest rate. Where your credit score falls within certain ranges is what really matters. If your scores fall outside of a certain range – for example, a 639 score instead of a 640 – it could cost you thousands of dollars in interest over the years.
That’s why it’s a good idea to know if you’re close to the next credit score tier and to raise your score a few points if you are able to.
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Generally speaking, the higher your credit scores are, the easier it will be to get a mortgage. Higher credit scores will also qualify you for lower interest rates, which means a smaller monthly payment and lower interest costs over time.
“[Credit score] also impacts the loan program, the amount of down payment required, and even how much you will pay for loan fees, mortgage insurance, and even homeowner’s insurance,” said Rachel Latin, a loan officer with Fairway Independent Mortgage Corporation (Fairway owns Home.com). “So, having the best possible credit score means the best possible rate and terms for your loan — and will ultimately save you money.”
Credit scores are a numerical representation of a borrower’s risk. A high credit score indicates that a borrower is responsible with their money and pays their debts on time, while a low score indicates the opposite.
As a result, lenders base their interest rates, in part, on credit scores – with riskier applicants, often those with lower credit scores, typically getting higher rates than borrowers with lower risk and higher scores.
Credit scores aren’t the only factor that affects your interest rate. Generally, if interest rates have risen, the rate you get may be higher as well. But credit scores are one of the biggest elements you can control.
At any given time, lenders have a base interest rate for each loan product and term. Those are the absolute lowest rates available, and they’re reserved for borrowers with excellent scores, usually 740 or above.
From there, they apply what are called loan-level price adjustments (LLPAs). These price adjustments are based on credit score ranges, and they essentially compensate lenders for the risk they take on by approving borrowers with lower credit scores and other higher risk factors.
Loan-level price adjustments (LLPAs)
LLPAs are typically set by investors — companies that buy mortgages after the loans close — although lenders can set their own as well, according to Bryan Moran, a senior vice president with Fairway, based in Frederick, Md.
“LLPAs are pricing adjusters to mitigate the risk commonly associated with certain factors,” Moran said. Examples of these factors would be higher LTVs with lower credit scores, certain property types (condo, multi-unit), and cash-out refinances, specifically with lower credit scores and higher LTVs.”
LTV means “loan-to-value” ratio. LTV is the calculation of the loan amount divided by the lower of the sales price or appraised value of the property.
Like lower credit scores, higher LTVs represent greater risk. The larger the loan, the more the lender has on the line. So again, LLPAs compensate for that risk.
For the most part, LLPAs are based on the following credit score brackets:
- 620 or lower
- 740 or higher
And the difference in rates for each of those brackets can be significant.
A homebuyer with a 679 qualifying score putting 15% down on a home may want to think about trying to raise their score to 680+. Why? Because the homebuyer will pay an extra 1.25% of the loan amount in fees or absorb that cost in the form of a higher rate.
If the homebuyer were applying for a $300,000 mortgage, that would translate to an extra $3,750 due at closing or about 0.25%-0.50% in higher interest rate. All this for being just one point shy of the next higher credit tier.
Down payment matters as well.
A buyer with a 680 score who puts 20% down will pay $1,750 in loan-level price adjustments for each $100,000 borrowed but just $500 per $100,000 borrowed if putting 30% down.
Combine a lower credit score and a high down payment, and a buyer could pay significantly more at closing and over the life of the loan.
So the question is, how do you raise your credit score before you apply for a loan?
If you plan to buy a home within the next few months, there are a few steps you can take to boost your score.
“The fastest ways to improve credit scores prior to applying for a mortgage would be to stop applying for and obtaining new debt, pay down all revolving debt to 35% utilization or less and to ensure all current debt is paid on time as agreed,” Moran said.
There are other steps you can take to raise your credit score as well, though these three will be most important.
Let’s look at how focusing on a few key areas can raise your credit score.
When a borrower applies for several new credit cards, an auto loan, or a personal loan around the same time they apply for a mortgage, each of those applications can show up as a hard inquiry on your credit history. It depends on the credit card provider and whether or not the application was the result of prescreening or not.
Lenders see multiple recent inquiries as potential signs that you are taking on significant debt, or that you are struggling financially. Avoid opening new accounts or taking out other loans in the months leading up to your application, because hard inquiries will temporarily lower your credit score.
One thing to note, though, is that applying with several mortgage lenders at once will not hurt your chances of getting approved. If you apply with, say, three mortgage companies in a 14-day window, they will be lumped together rather than counting as multiple hard inquiries.
You may have noticed that Moran referred to paying down your debt to 35% utilization or less. That’s the credit utilization ratio, which tells lenders how much credit you have available vs how much debt you’ve taken on.
If you have three credit cards with a total credit limit of $5,000 across all of them, you’d want your balances to be $1,750 or less.
The lower your balances and the higher your available credit, the better your utilization ratio.
Credit utilization is important to your credit profile — it’s the second biggest factor in determining your credit score.
But the biggest influence on your credit score is your payment history. Lenders want to see a history of on-time payments, because they are looking for signs that you are a reliable borrower.
Someone who has no late or missed payments on their credit history will have a higher score than someone who is frequently late paying on their credit card accounts, car loan, or student loans.
The best thing you can do for your credit score is to pay your bills on time every month. A smart hack is to set up automatic payments whenever that’s an option. That includes credit card bills, car payments, student loans, or other installment loan payments. Autopay ensures that you’re never late — and never get charged a late fee — and you don’t have to remember when each bill is due every month.
However, everyone makes mistakes. If you missed a payment once because you were sick and got a little behind on your bills, or you were out of work and struggled while looking for a new job, you can still qualify for a mortgage.
Your lender may ask you for a mortgage letter of explanation (LOX) detailing why you got behind and why it won’t happen with your mortgage payments. They simply need assurance that you are capable of making your payments in full and on time each month.
If you’re behind on a credit card bill or student loan, it’s important to bring these current before applying for a loan. You don’t want these to show as delinquent on your credit report, even if you’re behind by a relatively small amount.
“A common misconception is that delinquency on ‘small’ accounts with low balances or payments does not have a major negative impact, which is not the case,” Moran said. “Any late payment, regardless of size, can have a major impact.”
It’s important that you know what’s in your credit report, because outdated or inaccurate information can hurt your score or your chances of getting approved for a home loan.
You can request your free credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) at least annually through annualcreditreport.com.
Review your report for signs of fraud, errors in your payment history, or inaccuracies in your address history or contact information. If you spot any issues, you can file a dispute claim with the bureau that has the incorrect data.
Note that if the same problem appears on more than one report, you’ll need to file separate dispute claims with each credit bureau.
You can file disputes through each bureau’s website. You can also start a dispute claim over the phone or by mail.
If you have a limited credit history or you have a low score due to past financial challenges, opening a secured credit card can help you build credit.
With a secured card, you’ll put down a deposit (the amount varies based on the credit card provider’s guidelines and the type of account you open) that serves as collateral for the lender. In some cases, the deposit is equivalent to your credit line — for instance, you put down $250 and you receive a $250 credit line.
But there may be options for getting a higher credit line with a lower deposit, so shop around and compare offers.
You use the secured credit card the same way you would a standard credit card, using it for purchases and then making payments on the balance every month. The payments are reported to the major credit bureaus, and so making these on time can help raise your score.
If you keep your secured credit card balance low and make your payments on time, the credit card company may offer you a credit line increase (which improves your credit utilization ratio). Or, they may refund your secured card deposit and give you the option to switch to a standard credit card.
A simple way to improve your credit profile is to be added as an authorized user on a partner, spouse or relative’s account. Many credit card issuers allow cardholders to list additional authorized users. As an authorized user, you’ll receive a card for the account, and the credit line and payment history will appear on your credit report.
If the primary account holder has good credit and pays their bills by the due date each month, becoming an authorized user will help you build a history of on-time payments and improve your credit utilization ratio, without you even needing to contribute to charges and payments.
A few words of caution, though. It only makes sense to become an authorized user if you know the account holder manages their money well. If they’re often late on payments or tend to max out their credit limits, those behaviors will appear on your credit report and could hurt your score.
Additionally, the account holder will be able to see any charges you make on the card. If you’re uncomfortable with the idea of someone else seeing your transactions, this probably isn’t the best option for you.
Talk to your lender about a rapid rescore
If you apply for a mortgage and your credit score is a few points shy of qualifying, or of being eligible for a better interest rate, ask your loan officer whether a rapid rescore is an option.
A rapid rescore is an expedited request to credit bureau(s) asking them to update your credit report data and your credit scores immediately to reflect the change(s). Your lender may be willing to do a rescore, for example, if you pay down several account balances or if you paid off some accounts just prior to applying for the loan and such updates aren’t reflected yet in your credit report.
“The credit report is a snapshot of the credit profile at the time we pull the report,” Latin said. “So, for example, if the balance on a credit card was reporting as $1,000 but the borrower recently made a payment to reduce that balance to $250, the lender can request that the report be updated to reflect this new information. Then the FICO score is recalculated based on this revised report.”
Rapid rescores cannot be done by you. Only lenders can request rapid rescores and not all lenders will partake in doing so. But even if they don’t do rapid rescores, they may be able to advise you on which accounts to pay down, pay off or what steps to take to increase your scores to where they need to be in order for you to get the best possible interest rate and terms available to you.
Take free credit score app results with a grain of salt
Not all credit scores are created equal.
Free credit scores received through popular credit score sites and apps do not present the same scores a mortgage lender will use to qualify you.
Most or all credit score apps present a consumer credit score, which can be more than 100 points higher than the FICO score that most auto and home lenders use.
So if you receive high scores through free credit apps, don’t celebrate yet. You’ll need to apply with a mortgage lender to learn of your true FICO mortgage credit scores and what you will qualify for.
It can be disheartening to realize your credit scores aren’t perfect, but it doesn’t mean you can’t buy a home — nor that you’ll need to break the bank to do so.
“One of the major common misconceptions is that you have to have ‘perfect’ credit, which is simply not the case for most first-time homebuyers,” Moran said.
For one thing, your credit score is only one part of the picture.
“Having a higher credit score is a very important first step, but it isn’t the only factor used to qualify someone,” Latin explained. “Once we know the score satisfies the loan product’s requirements, other factors like debt ratios, bank assets, and income will determine exactly how much the client can borrow.”
If your credit score is low, you may be able to compensate for it with a larger down payment or other factors. And even if you can’t afford to put a large amount down, there are still a lot of options.
“It’s really important for potential buyers to understand they don’t need perfect credit to buy a home,” Latin said. “There are so many programs out there that are geared toward different buyers and different purchase scenarios. That’s why it’s so important to talk to a lender that’s willing to coach you on how to prepare for a home purchase.”
Indeed, the minimum credit score to buy a house varies widely. You may qualify for an FHA loan with 3.5% down with a credit score of 580 or higher. VA and USDA loans have flexible credit score requirements, and conventional loan credit score requirements begin at 620.
If you’re not sure what your credit scores are, or you’re worried they may be too low to qualify for a mortgage, talk to a lender. They can pull your credit report and tell you what loan programs you’re eligible for, what your interest rate might be, and how you can get your score higher to qualify for more preferable terms.
They can also tell you what not to do, because you want to be strategic about raising your credit score before you buy a home.
“Many borrowers believe they have to pay off all medical bills or collections prior to applying for a mortgage, which is not accurate,” Moran said. “In fact, paying off older collection accounts can actually hurt your credit scores in the short-term, and most [loan] products and programs do not even consider medical collections in their decisioning logic.”
The bottom line: Talk with a lender if you’re ready to buy a home but you’re not sure where your credit score stands.
Raising your credit score FAQs
The best ways to raise your credit scores include paying your bills on time and reducing your account balances. However, big changes such as paying off an account can take 30-45 days to appear on your credit report.
If you need to raise your score fast, perhaps to qualify for a mortgage loan, you can ask your lender if they can do a rapid rescore. A rapid rescore is a request to credit bureaus to update your report data and score within days rather than weeks or more, and it can help if you need to boost your score to qualify for a loan or a better interest rate. But rapid rescores are expensive, and some mortgage lenders will not request one for you, since they are not allowed to pass the cost on to you, the applicant.
The credit score needed to buy a house depends on the type of loan you want to use, and on the guidelines of the lender.
Conventional loans require a credit score of 620 or higher to qualify — although the higher your score, the better your interest rate is likely to be.
You may qualify for a government-backed, 3.5% down FHA loan with a credit score of 580 or higher (you may qualify with a score of 500-579 if you can put down 10%). The VA does not set a minimum credit score for its program. USDA recommends having a minimum score of 640.
The VA and USDA give lenders discretion in approving borrowers for these loans, which means that you may qualify with a lower credit score if you have compensating factors (such as significant savings, high or steady income, etc.).
Lenders can also set higher credit score minimums than the government’s recommendation. It’s smart to get quotes from several different lenders, because their approval guidelines can vary.
Credit scores aren’t the only thing that matters when you’re buying a house, but it does make a difference in your eligibility and how much you’ll pay for the home. That’s why it pays to start working on your credit and personal finance skills as soon as you start thinking about the possibility of homebuying.
“The best way to improve the credit score is to create good credit habits as soon as possible,” Latin said. She noted that most buyers see improved scores within three to six months once they develop smart credit practices.
Fairway is not a registered or licensed credit management service provider. Please consult a credit counselor regarding your specific situation. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.