Your credit score is one of the three main criteria used to qualify for a mortgage. The
two other factors are: DTI Ratio (debt to income), which is your income versus your
expenses, and LTV (loan to value), which is the value of your home versus how much
There are three major credit bureaus: Transunion, Experian, and Equifax. Your credit
report may differ by credit bureau, so it is not uncommon for you to have three different
credit scores. The high and low scores are ignored, and the middle score is used for
qualification purposes. For example, assume your scores are 680, 700 and 720. In this
instance, 700 would be the score used for qualification purposes.
Your score matters to lenders because based on experience and analysis, the lower the
score the higher risk of non-payment. Some may say that this is not always the case and
they’re right, but there is no way to quantify this mindset on an application. So your
credit score is the key factor used in determining your risk to a lender.
In years past, there was no minimum credit score requirement for Federal Housing
Authority (FHA) loans. However, that has changed and now the minimum score is 620.
Further, the lower your score, the higher the rate you can expect and vice versa. If your
score is lower than 620, you will need to work on improving your credit to get it above
the minimum threshold before applying for a FHA loan. By working to improve your
credit score, you may be able to save more in the long run in decreased interest costs.
Because lenders offer interest rates based on credit risk factors, anyone considering a
FHA loan should take a good look at their credit report and improve their score as much
as possible before submitting an application. With a good credit score of approximately
700, you can expect a moderate rate based on the current market rates. But if you
could improve your score by paying your bills on time or perhaps paying down the
balances, the lower rate you receive would mean lower monthly payment and savings
in the long run. For example, take an average sized loan of $250,000 and assume a
0.5% reduction in your rate, you could potentially save $30,000 over the life of the loan.