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Lenders use your three-digit credit score as a way to predict how likely a borrower is to repay a loan on time. Higher scores signal a great likelihood of repaying a loan; lower scores a lower likelihood. Lenders tend to give the best rates to someone with a higher score, though other factors typically play into who gets the best rates. (See the lowest mortgage rates you may be able to get here.)
What is your credit score made up of?
A credit score is composed of a number of factors, though there can be small variances among the percentages that making up a credit score, according to FICO. The factors making up a credit score include one’s payment history, unpaid debt, the number of outstanding loans, how long loan accounts have been open, how much available credit is being used and whether bankruptcy has ever been declared.
Credit mix | 10% |
New credit | 10% |
Length of credit history | 15% |
Payment history | 35% |
Amount owed | 30% |
Need help making sense of this chart? Here’s what each term means: The credit mix includes all the types of credit cards, retail accounts, loans and mortgages one has; while new credit indicates the opening of accounts (if several are opened in a short amount of time, it can represent greater risk). Meanwhile, length of credit history includes how long your accounts have been established and how long it’s been since you’ve used certain accounts. Amounts owed reveals how much outstanding debt you have and payment history shows whether you’ve paid past accounts on time.
What is a good credit score to get a home loan?
“Generally speaking, a score of 740 or higher will help you get the best possible rate on your loan and make it easier to find a lender. That said, plenty of lenders could still be willing to work with you if your credit score is 670 or higher,” says Jacob Channel, LendingTree’s senior economic analyst. And Sara Rathner, personal finance expert at NerdWallet, notes that there are variations in what scores a lender wants, as “there are different credit scoring models that lenders use to make decisions.”
You may be able to get a loan with an even lower score: Depending on other factors like what your income is and how much debt you have, you can potentially qualify for a mortgage loan with a credit score as low as 500.
Credit scores for an FHA loan
Federal Housing Administration (FHA) loans are government-insured (though not government-issued) loans that enable home buyers and homeowners with less-than-ideal credit and smaller down payments to purchase a home, refinance their existing mortgage or renovate a home. FHA loans are traditionally used by first-time buyers or buyers who have been out of the housing market for a while. “Because FHA loans require as little as 3.5% down, they’re a good option for buyers who aren’t cashing out of another house,” says Bankrate.com analyst Jeff Ostrowski. In some cases you can get an FHA loan with a credit score as low as 500 (but this requires a larger down payment), but more commonly you will need a credit score of 580 or higher, a debt-to-income ratio of 50% and other requirements you can find in this MarketWatch Picks guide.
Credit scores for a VA loan
A VA loan is a government loan that’s available to active and veteran service personnel and their eligible surviving spouses. You can get a VA loan with zero down payment and they offer lower interest rates than other mortgages, plus they don’t have a monthly mortgage insurance requirement. VA loans don’t require a minimum credit score; instead individual lenders determine their specific requirements and the VA doesn’t limit how much you can borrow, but the loan limit for a no-down-payment loan is $647,200 for many counties. Still, even with zero down, be prepared to pay closing costs and other fees. One example? A VA funding fee which ranges from 1.4% to 3.6% of your loan amount and showing that you have 2 months’ worth of mortgage payments in a reserve fund.
Credit scores for USDA loans
An USDA loan is a zero-down-payment mortgage specifically designed to benefit rural and suburban homeowners who have very low incomes, for homes that measure 2,000 square feet or less. Interest rates on these loans can be as low as 1% and borrowers with credit scores below 640 may be eligible for USDA loans but will have to go through manual overwriting, taking factors like cash reserves and low debt into consideration.
What are the various credit score levels?
Poor credit | 300-579 |
Fair credit | 580-669 |
Good credit | 670-739 |
Very good credit | 740-799 |
Excellent credit | 800-850 |
*Source: Experian
- 800-850: Excellent credit — Borrowers with a credit score in this range can typically expect to get the best possible rates on their loans.
- 740-799: Very good credit — Borrowers with this score will generally be seen as appealing to lenders and will usually get a very competitive rate on their loan. “In some instances, a lender may look at someone with a score between 740 and 799 just as favorably as they would look at someone with a score of 800 or higher,” says Channel.
- 670-739: Good credit — People with scores in this range can typically find a lender who will be willing to work with them. But that lender may not give them as good a rate as they would something with a score of 740, or higher and they may also require other things like a higher down payment.
- 580-669: Fair credit — Some lenders may be willing to work with people who have scores in this range, though finding a lender is likely going to be more difficult. Not only that, lenders who do offer loans to borrowers with scores in this range are likely to require higher down payments or some type of loan insurance, says Channel.
- 300-579: Poor credit — Though they may still be able to get a loan, those with credit in this range will probably have difficulties finding a lender willing to work with them. Lenders who offer loans to people with scores in this range will likely offer them higher rates and less favorable terms and they may even require the borrower to have a co-signer with better credit.
What is excellent credit vs. poor credit?
Poor credit would be 579 or lower, while very good to excellent credit would be 740 and higher, and excellent credit is a score of 800 or higher. “With poor credit, you may be able to qualify for some loans, but you’ll likely have a harder time finding a lender, and you’ll probably be given a higher rate. Those with excellent credit tend to have an easier time getting a lender to give them a loan and the rates offered are usually about as good as one could hope for,” says Channel.
How can someone view their credit score?
Experian and Discover offer free FICO scores to everyone, and many banks and credit card issuers offer free access to their own customers. “You’re allowed to request a free copy of your credit score from the three major credit reporting agencies, Equifax, Experian and TransUnion; just check their website for instructions on how to request your score,” says Channel. Reports are typically available from each service once per year, so it’s possible to check your credit a few times each year by rotating through each servicer’s free copy.
Why is a credit score important?
“Your credit score is one of the most important numbers in your financial life. It goes a long way toward determining whether or not you’ll be approved for loans and lines of credit, along with the interest rates you’ll pay,” says Ted Rossman, senior industry analyst at Bankrate. Landlords, insurance companies, cell phone companies and utility companies often check credit scores.
How can someone qualify for a home loan with bad credit?
In a situation like this, you’ll likely want to pursue a government program like an FHA loan or a VA loan, as they tend to allow lower scores. “If you have bad credit, you should try to strengthen it as much as possible before applying for a loan by paying down other debts and making all of your payments on time,” says Channel. If you don’t have enough time to work on your score, you should expect to need to put down a larger payment, pay loan insurance or get a co-signer.
Robert Heck, vice president of mortgage at Morty, says there are options for people with low credit scores to get approved for a mortgage; however, homebuyers in this instance may end up paying more over the life of the loan via high-interest rates and closing costs. “If you’re a prospective homebuyer with a credit score under 620, consider the long-term costs on a mortgage that is available to you now versus waiting for a future mortgage while you work to improve your credit score. What can look like a small bump in interest rate because of your credit score can be a significant amount of money over the life of the loan,” says Heck.
What is a credit history?
Your credit history is essentially your financial report card. “It’s synonymous with your credit report which is a document that summarizes your history of loans and lines of credit, including whether you paid on time, how much you owe and how many different accounts you’ve had,” says Rossman.
How do credit scores fit into the larger picture of your finances when applying for a home loan?
Your credit score is a key component of just about any loan application, but lenders do consider other factors too, including your debt-to-income ratio; employment history, down payment, savings and more.
What’s the importance of credit score vs. other factors in getting a loan
It’s similar to a college application — your credit score is like your GPA or your SAT score. “It’s an important metric that’s easily understood and lets decision-makers compare various applicants. It’s not the only factor, but it’s a big one,” says Rossman. If you have a borderline credit score, lenders may take an even closer look at the other factors such as your income, your debt-to-income ratio and how you’ve managed specific accounts. In general, higher credit scores give you better odds of qualifying for a lower interest rate on a loan.
Lenders also look at debt-to-income ratio (DTI), your monthly debt payments divided by your gross monthly income. The result is a percentage and the lower your DTI, the better. Many lenders require a DTI of 50% or less, but some have an even lower threshold, like 30%.
Another thing lenders take into consideration is your work history, the amount of your down payment and the value and condition of the home you’re looking to purchase.
How do lenders use someone’s credit history?
Your credit history serves as the foundation for your credit score, so that 3-digit number is a neat way to encapsulate things like your on-time payment history, how much you owe, the different types of credit accounts you’ve managed and more. “For a deeper dive, lenders can look at specific aspects of the report, but the credit score is a quick and easy summary to put all borrowers on the same scale,” says Rossman.
How does one’s credit affect one’s interest rates?
The higher your credit score, the lower the interest rate you’ll pay, especially on a long-term, big-ticket item like a mortgage. This can end up saving you tens of thousands of dollars over the life of the loan.
How does your credit change after you’re approved for a loan?
Your credit score often drops a little bit (think: 5 to 20 points) after you take out a loan. “There are some slight dings associated with the hard inquiry, which is the formal application for credit. Lenders don’t want to see too many of these all at once, though this drop should be short-lived and minimal. As you hopefully manage the account responsibly, your score will increase over time,” says Rossman.
Aside from credit score, what other factors should someone consider when buying a home?
“When buying a home, also consider your budget in general so you don’t take on a mortgage that’s hard to afford in the long term,” says Rathner. Before buying a home, you should ask yourself if you have the money necessary to make monthly payments on time without becoming excessively burdened with housing costs. Remember that just because you can technically qualify for a mortgage doesn’t mean you should rush out to get one. “In some cases, you might be better off waiting until you’ve saved more money for a down payment or earn a higher income before you’re really ready to buy a home,” says Channel.
Related questions
What is a good credit score to rent an apartment?
Bankrate’s Rossman says some landlords have a minimum standard closer to 650 or even as high as about 680. “I’ve seen various estimates that place the floor as low as about 600 in some cases. I’d say you have a strong chance of being approved for an apartment lease if you have a credit score in the upper 600s or higher, along with sufficient income,” says Rossman.
Channel says it’s worth noting that many landlords have a minimum income requirement in addition to credit score requirement. “If you want to know more about what your landlord expects, ask them before submitting a rental application,” says Channel.
What is a good credit score to buy a car?
“The best rates typically go to borrowers with credit scores of 740 and up. You can still get a pretty good rate at 670 or better, but below that, there can be a steep dropoff,” says Rossman.
What is a good credit score to lease a car?
Like buying a car, if you’ve got a score of 670 or higher, you’ll likely be able to lease a car, assuming other aspects of your financial profile like your income and debt levels are solid, says Channel.
The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.
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