Buying a home? What's your credit score?
Having a higher credit score can save you significant money over the life of your loan. What should you aim for?
This post comes from partner blog The Dough Roller.
When it comes to mortgages and credit scores, there are two really important questions to ask:
- What credit score do I need to qualify for a mortgage?
- What credit score do I need to get the lowest interest rate on a mortgage?
These different but related questions are important if you are looking to buy a home. And the second question is particularly important. With a high FICO score, you can literally save tens of thousands of dollars in interest over the life of a home loan.
So let's take a look at both questions.
What credit score do you need to qualify for a mortgage? The first thing to keep in mind is that qualifying for a mortgage involves a lot more than just a credit score. While your FICO score is a very important ingredient, it is just one factor. Lenders also look at your income and level of debt, among other things.
As a rule of thumb, however, a credit score below 620 will make buying a home very difficult. A FICO score below 620 is considered subprime. In the past, there were mortgage companies that specialized in subprime mortgages. Because of the challenges in the credit market, however, subprime loans have become difficult if not impossible to obtain. (Estimate your credit score for free.)
A FICO score between 620 and 650 is considered fair to good credit. But keep in mind, this range of credit scores does not guarantee you will qualify for a mortgage, and if you do qualify, it won't get you the lowest interest rate possible. Still, aim for a score of at least 620, recognizing that other factors weigh in the decision and that some banks may require a higher score. Post continues after video.
What credit score do you need to get a low rate mortgage? It used to be that a score of about 720 would yield the lowest mortgage rates available. Today, the best rates kick in with a FICO score of 760. And interest rates go up significantly as your credit score drops.
To give you an idea, the following table shows recent rates by credit score and calculates a monthly principal and interest payment based on a $300,000 loan:
Of course, interest rates can change daily, but the above table gives you an idea of the importance of a high score when you apply for a mortgage. From the top credit score range to the bottom is a difference of more than 1.5 percentage points.
While that may not seem like a lot, it results in a higher payment of more than $250 per month. And over the life of a 30-year mortgage, a credit score of 760 or higher compared with a score of 620 will save you about $102,000 in interest payments on a $300,000 mortgage.
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