You have probably heard that if you want to obtain a loan on anything from a car to house, you will need to have a good credit score, but if you are like many other Americans out there, you probably don't know what exactly characterizes a good score.
When it comes to home buying, there is unfortunately no magic credit score that will guarantee your approval for a loan. Every lender has different standards, and there are also many other factors that go into determining who is approved and what their loan terms are. Nevertheless, there are still some general standards many lenders follow, and knowing these standards can help you set goals and determine the best time to buy a home. (Click the headline to tweet)
Before going into detail on what makes a credit score great, good or poor, it is important you understand exactly what a credit score is. A credit score is a three-digit number that reflects your financial responsibility. FICO, one of the most commonly used credit scoring models, incorporates the following into the calculation of your score:
- Payment history - 35 percent
- Amounts owed - 30 percent
- Length of credit history - 15 percent
- Credit mix - 10 percent
- New credit - 10 percent 1
FICO scores range from 300 to 850. As you can see, payment history is the most important factor affecting your credit score, so one of the most important things you can do to ensure a healthy score is to make on-time, in-full payments on any credit you have due.
The three major credit reporting bureaus - Experian, TransUnion and Equifax - all calculate your credit score, and you have a right to obtain a free copy of your report from each bureau once a year at www.annualcreditreport.com. It is important to regularly check your score to see where your weaknesses are and make a plan to improve them while also checking for any errors. Errors are quite common on credit reports, as it is easy for the agencies to mix up people with similar names or addresses. These errors can significantly reduce your score, so if you do find an error, make sure to contact the bureau in question as soon as possible to get it taken care of.
In general, scores of 760 and higher are considered excellent.
Credit Scores and Mortgages
In general, scores of 760 and higher are considered excellent. Consumers in this category will probably be able to get a home loan with very low interest rates. If your score is between 700 and 760, it's still considered very good. You will still have access to a low interest rate, though it will probably be about a quarter of a percent higher than the lowest possible rate. Scores between 660 and 699 are good, and those in this range will likely pay about 0.5 percent above the lowest interest rate available.
When scores drop below 660, the interest rates begin to climb significantly. Those with a moderate credit score, between 620 and 660, should expect to pay an interest rate about 1.5 percent higher than the lowest one available, and those with a score between 580 and 620 will probably pay about 2 to 4 percent more. Scores of 500-580 will make it extremely difficult to get a mortgage, but if you are able to gain approval, your interest rates will be very high.2
The type of loan you apply for also matters when it comes to the ideal score. FHA loans, for example, are easier to obtain because they are backed by the Federal Housing Administration. Thus, lenders are more willing to issue them to applicants with lower scores.3
In addition to making on-time payments, there are many more steps you can take to improve your credit score, but it takes time to move those numbers up. The sooner you start working toward a healthier score, the sooner you will be able to afford the home of your dreams.
If you want a better idea of the kind of loan your credit score will qualify you for, contact the Loan Officers at New American Funding today. We can help determine the best possible loan package you can obtain based on your current financial situation.