If you’re looking to buy a home, you’re probably aware of the importance of your credit score. But what exactly are mortgage lenders looking for when they review your credit history? In this article, we’ll take a closer look at FICO scores and how they impact your ability to get a mortgage.
What is a FICO Score?
A FICO score is a credit score developed by the Fair Isaac Corporation. It’s one of the most widely used credit scoring models in the United States. Your FICO score is based on information in your credit report, including your payment history, credit utilization, length of credit history, new credit accounts, and types of credit.
FICO scores range from 300 to 850, with higher scores indicating a lower risk to lenders. Generally, a FICO score of 740 or higher is considered excellent, while a score of 620 or lower is considered poor.
Why Do Mortgage Lenders Care About FICO Scores?
When you apply for a mortgage loan, the lender wants to know how likely you are to pay back the money you borrow. Your FICO score is one of the key factors lenders use to assess this risk.
A higher FICO score typically means you’re a lower risk borrower. This can translate into better loan terms, including lower interest rates and lower fees.
What FICO Score Do You Need to Get a Mortgage?
While there’s no hard and fast rule about what FICO score you need to get a mortgage, most lenders have a minimum score requirement. This requirement can vary depending on the type of mortgage you’re applying for, your down payment, and other factors.
Generally, a FICO score of 620 or higher is required to qualify for a conventional mortgage. However, some lenders may require a higher score, particularly if you’re looking for a jumbo loan or if you have a high debt-to-income ratio.
How Do Your FICO Scores Impact Your Mortgage Rates?
Your FICO score can have a big impact on the interest rate you’re offered on your mortgage loan. Generally, the higher your FICO score, the lower your interest rate will be.
For example, with a FICO score of 760 or higher, you may be able to qualify for an interest rate of around 3.5%. However, if your FICO score is in the 620-639 range, you may be offered an interest rate of around 5.5%.
What Other Factors Do Mortgage Lenders Consider?
While your FICO score is an important factor in getting approved for a mortgage, it’s not the only factor. Lenders will also consider your income, employment history, debt-to-income ratio, and other factors when assessing your creditworthiness.
For example, even if you have a high FICO score, if you have a high debt-to-income ratio, you may not be able to qualify for a mortgage.
How Can You Improve Your FICO Score?
If your FICO score is lower than you’d like it to be, there are things you can do to improve it. One of the most important things you can do is make sure you’re paying your bills on time.
Other tips for improving your FICO score include keeping your credit utilization low, avoiding opening too many new credit accounts at once, and checking your credit report for errors.
Conclusion
Your FICO score is an important factor in getting approved for a mortgage. While there’s no hard and fast rule about what score you need, most lenders have a minimum requirement. By understanding what lenders are looking for and taking steps to improve your score, you can increase your chances of getting approved for a mortgage and getting favorable loan terms.