Do You Have a Bad Credit Score?
If you’re thinking about buying a home or refinancing your existing mortgage in the near future, you’ve probably reviewed your credit score recently. Mortgage lenders use your FICO® credit score to evaluate how you’ve managed your loans and lines of credit in the past and how likely you will be to repay your new home loan. While you do not need perfect credit to qualify for a mortgage, a lower credit score can lead to higher interest rates or worse, the inability to qualify at all.
What is considered a “bad” credit score and what can you do to improve yours?
The FICO® credit score is the credit score most widely accepted by lenders. FICO® ranks your credit score based on ranges. Exceptional credit ranges from 800-850, followed by very good from 740 to 799, good from 670 to 739, fair from 580 to 669, and poor from 300 to 579. Different types of mortgage loans require different levels of credit to qualify. FHA Loans, for example, offer more lenient credit requirements because they are designed for first-time home buyers or low to moderate income buyers that may have struggled to build credit in the past. Even if your credit score is not a perfect 850, it is not considered poor unless it is 579 or lower.
Your credit score is influenced by five differently weighted factors including payment history (35%), credit utilization (30%), credit history (15%), credit mix (10%), and new credit (10%). Your credit score will drop if you fail to make payments on time, borrow more than 30% of your total credit limit, close older accounts, do not have a diverse mix of credits, or if you apply for a new loan or line of credit. The idea of the credit score is that it proves to potential lenders that you manage your existing loans and lines of credit responsibly and will continue to do so if they issue you a new loan or line of credit.
Improving your credit score takes time, so if you have a low score you should start credit repair six months to one year before you plan on applying for a new home loan or refinance. One of the first proactive steps you can take to improving your credit is paying bills on time and reducing your overall balance, since payment history and credit utilization make up the bulk of your score. If you are carrying a balance on a credit card, try paying at least the minimum payment due each month. If you have a lot of high-interest debt, like credit card debt, you could also benefit from consolidating your debt with a lower interest option like a personal loan. Consult with a financial advisor or credit counselor before making any major changes.
Having less-than-perfect credit will not disqualify you from getting a mortgage loan, but you could pay for it with a higher interest rate. If you’d like to know how your credit score will impact your ability to qualify for a mortgage talk with a loan officer before you start your home search.