How To Get A Mortgage With Good – But Not Great – Credit

The recent spate of historically low mortgage rates has been a boon for even the most creditworthy borrowers. The best deals on home loans go to borrowers with a credit score above 740, and many Americans who have refinanced or taken out mortgages in the past year brag about having a credit score approaching the lowest. 800, an almost perfect score.

But most Americans have credit scores 100 points lower than these high levels. If your credit score is below 740 – and most Americans are between 710 or below, according to the Experian credit bureau – you can still get a mortgage purchase or refinance your existing loan.

However, you will have to choose between paying a slightly higher interest rate on a conventional loan or paying a higher fee on a mortgage through the Federal Housing Administration or the United States Department of Veterans Affairs.

The credit score gap

Your credit score is the most important factor in determining your interest rate. The highest possible credit score in the FICO system is 850. A score above 740 is considered excellent.

According to Experian, half of Americans 56 and under have credit scores of 600 or less. While the median baby boomer credit score is 755, the median millennial credit score is only 678. Even Generation X, whose seniors are well into their 50s, has a median credit score of only 699, Experian reports.

“The Baby Boomers and the Silent Generation are pulling everyone’s average up,” says Ilyce Glink, CEO of Best Money Moves, a financial wellness company.

In late 2020 and early 2021, median mortgage borrower credit scores reached an all-time high of 788, according to the Federal Reserve Bank of New York. The typical credit score for mortgage borrowers had fallen to 781 by the third quarter. In the days of loose lending that led to the Great Recession, by contrast, the median credit score for mortgage borrowers fell to 707.

Meanwhile, only a quarter of borrowers who obtained home loans during the summer months had credit scores below 729. According to data from the New York Fed, only 10% had credit scores below. 677.

If your credit history looks good but not great, don’t despair – you may still be eligible for a loan. However, you will have to compromise, either by paying a little more for a classic loan, or by taking another type of loan with competitive interest rates but higher fees.

Option 1: Pay more for a classic loan

For most borrowers, mortgages guaranteed by Fannie Mae and Freddie Mac offer the best value for money. These loans offer the best rates to borrowers with a credit score of 740 or higher.

However, you can still qualify for a conventional loan with a credit score as low as 680, says Rocke Andrews, broker-owner at Lending Arizona in Tucson.

The downside is that you will be paying a higher rate of interest. If you invest at least 5% in the property, expect to pay an additional 0.375 percentage point.

On a 30 year mortgage for $ 300,000, this works out to about $ 60 per month. In other words, the penalty for a less than stellar credit score is around $ 720 per year.

Option 2: Go for an FHA or VA loan

The FHA mortgage program is designed for homeowners who are unable to qualify for conventional loans, either due to credit problems or a lack of funds for a down payment. FHA loans are available for borrowers whose credit score does not exceed 580.

While FHA interest rates are competitive, there is a costly trap: All FHA loans require the borrower to pay two mortgage insurance premiums. There is an initial mortgage insurance premium of 1.75% of the loan amount – on this example of $ 300,000, $ 5,250.

FHA loans also charge an annual mortgage insurance premium of up to 1.05%, which can add hundreds to your monthly payment.

VA loans are available for serving and former members of the US military. They don’t require a minimum credit score, but come with a financing charge of 2.3%, or $ 6,900 on a $ 300,000 loan.

How to improve your credit score

While you may qualify for a loan with less than perfect credit, you should continue to strive to increase your score for future loans. Three tips:

Pay on time. Payment history is the most influential factor with FICO and VantageScore credit scores. With FICO in particular, the payment history is worth 35% of your credit score. Even occasional late payments can have a significant negative impact on your credit score. If you need help breaking the habit of paying late, automatic payments and an emergency fund could both work in your favor.

Reduce your credit utilization rate. After your payment history, your debt to your available credit is the second most important factor in your credit score. FICO bases 30 percent of your credit score on the “Amounts Due” category of your credit reports. Your credit utilization rate – the relationship between balances and your credit card limits – has a big influence here. When you pay off your credit card balances and reduce your usage rate accordingly, your credit score can improve. To quickly determine your current ratio, check out Bankrate’s credit utilization ratio calculator.

Don’t ask for new accounts too often. When you apply for a new line of credit, a serious request is recorded on your credit report. This type of survey has the potential to temporarily lower your score. A serious credit investigation will stay on your credit report for 24 months and can affect your credit score for the first 12 months.

Learn more:

How to improve your credit score

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