Your credit score has a significant impact on your ability to obtain a mortgage loan. It impacts not only your initial loan qualification but also your interest rate, down payment requirements, and other mortgage terms.
Are you thinking about buying a house and want to make sure your credit is in good shape? Here's everything you need to know about it.
Key Takeaways
- Some mortgages require minimum credit scores of 640 (traditional adjustable-rate loans), while others require only 500. (some FHA loans).
- Your credit score impacts your loan prices; a higher score indicates that you are more likely to pay your payments on time and that you may be eligible for cheaper interest rates.
- Most lenders utilize a "tri-merge" credit report, which combines information from several credit bureaus.
- Others may rely on a "residential mortgage credit report," which contains additional information about your financial situation, such as rental history or public records.
How Your Credit Score Impacts Your Mortgage Prospects
Your credit score will be crucial if you're thinking about buying a house. It will affect which loan choices you can even consider as a homeowner at the outset. While some loan types (traditional adjustable-rate loans) require minimum credit scores of 640, others require only 500. (some FHA loans).
Because your credit score represents your level of risk to a mortgage lender, it will impact the costs of your loan. A higher credit score indicates that you pay your expenses on time and will likely repay your mortgage in the same manner. As a result, you'll be able to take advantage of cheaper interest rates.
However, if your credit score is low, you're a dangerous bet for a lender. To compensate for the increased risk—the possibility that you won't pay your loan or the house will be foreclosed on—they'll raise the interest rate to protect themselves.
Assume you're buying a $250,000 home in Texas with a 10% down payment. Your interest rates in 2019 would have looked somewhat like this, according to the Consumer Financial Protection Bureau:
| Effect of Credit Score on Loan Rates (2019) |
| Credit Score Range |
Interest Rate |
| 620 to 639 |
5.25% to 5.99% |
| 640 to 659 |
4.125% to 5.875% |
| 660 to 679 |
4.0% to 5.625% |
| 680 to 699 |
3.875% to 5.625% |
| 700 to 719 |
3.75% to 5.5% |
| 720 to 739 |
3.75% to 5.125% |
| 740 to 850 |
3.625% to 4.99% |
The difference in interest paid throughout the loan's lifetime could be significant. On this particular loan, a one-percentage-point difference (3.625 percent vs. 4.625 percent) would result in over $11,000 in interest savings over the first five years and nearly $50,000 in savings over the 30 years.
Mortgage rates fell to historic lows due to the COVID-19 pandemic in 2020 and 2021 but have subsequently risen to pre-pandemic levels. Based on your credit score in 2022, here's the range of interest rates you can expect:
| Effect of Credit Score on Loan Rates (2022) |
| Credit Score Range |
Interest Rate |
| 620 to 639 |
3.625% to 6.25% |
| 640 to 659 |
3.625% to 6.125% |
| 660 to 679 |
3.625% to 6% |
| 680 to 699 |
3.5% to 5.625% |
| 700 to 719 |
3.5% to 5.625% |
| 720 to 739 |
3.375% to 5.5% |
| 740 to 850 |
3.375% to 5.375% |
Credit Score Requirements by Mortgage Loan Type
There are four main types of mortgage loans:
- Fannie Mae and Freddie Mac-backed conventional mortgages.
- FHA loans, or Federal Housing Administration loans.
- USDA loans, which are intended for rural properties and are backed by the United States Department of Agriculture.
- Veterans Affairs (VA) loans, which are targeted for service personnel and veterans.
Each of these loans has different credit score requirements. Here’s how they break down:
- FHA loans: A minimum score of 500 is required, with an average score of 680.
- Conventional loans: 620 to 640 minimum, depending on the type of loan
- USDA loans: Minimum 580 though 640 preferred
- VA loans: No credit score requirement
Your credit score is closely related to the amount of money you'll have to put down on an FHA loan. If your credit score is 580 or higher, you'll need to put down at least 3.5 percent. If your credit score is 579 or lower, you'll need to put down at least 10%.
What Kind of Credit Report and Score Do Lenders Use?
Depending on who gives the score (a bank, FICO, or VantageScore) and the lending business, there are different variations of your credit score (auto, mortgage, or credit card).
To limit risk and ensure that they're getting the most accurate image of a mortgage borrower, most lenders will use a "tri-merge" credit report, which provides credit statistics from three credit agencies.
They may also use a "residential mortgage credit report," which may include additional financial information such as rental history or public records. These reports include information from various credit bureaus, such as TransUnion, Experian, or Equifax, or all three.
In many circumstances, the credit score you see as a consumer—through your bank or credit card provider, for example—is not the same as the credit score a potential mortgage lender sees.
Improving Your Credit Score
Your repayment history, total balances on your accounts, length of time you've held those accounts, and the number of times you've asked for credit in the last year are all factors that go into determining your credit score. You can raise your score by improving in any of these areas.
You can:
- Pay off any outstanding loans or credit card balances.
- Resolve any credit or collection difficulties.
- Avoid creating new accounts or taking out new loans.
- Always pay your payments on time.
You should also obtain a copy of your credit report and review it for any mistakes. If you identify any, register a dispute with the credit bureau that issued the report, along with the necessary proof. Correcting these errors could help you improve your score.
Each of the three credit bureaus is required by law to provide you with a free copy of your credit report once a year. The three major credit bureaus—Equifax, TransUnion, and Experian—increased the frequency to once per week on April 20, 2020, in a program that was intended to terminate after one year. It was later extended, allowing people to access a free copy of their credit report every week until 2022.
