If you're considering buying a home, one crucial factor that lenders will evaluate is your credit score. This three-digit number plays a significant role in determining your eligibility for a mortgage and the interest rates you'll be offered.
Understanding what a credit score is, how it's calculated, and what range is considered ideal for home buyers can help you navigate the process more effectively. Here's a quick guide.
What Is a Credit Score?
A credit score is a numerical representation of your creditworthiness, ranging from 300 to 850 for the FICO® Score and 300 to 850 for the VantageScore® model. It's a statistical calculation based on various factors in your credit report, reflecting your borrowing history and ability to repay debt. Lenders use this score to assess the risk of lending to you.
How Is a Credit Score Calculated?
Credit scores are calculated using several factors, each carrying varying weights. Here are the primary components:
Payment History (35% for FICO®)
This component evaluates your track record of making payments on time for various types of credit accounts, such as mortgages, auto loans, credit cards, and personal loans. Late or missed payments can significantly impact your score.
Debt-to-Credit Utilization (30% for FICO®)
This factor considers the amount of credit you're currently using compared to your total available credit limits. High balances relative to your credit limits can negatively affect your score.
Length of Credit History (15% for FICO®)
The length of time you've had credit accounts open contributes to your score. A longer credit history generally reflects better creditworthiness.
Credit Mix (10% for FICO®)
Lenders favor individuals with experience managing different types of credit, such as revolving accounts (credit cards) and installment loans (mortgages, auto loans).
New Credit Accounts (10% for FICO®)
Opening too many new credit accounts in a short period can indicate higher risk and may temporarily lower your score.
What's the Ideal Credit Score for Buying a Home?
While credit score requirements can vary among lenders and mortgage programs, here's a general guideline for the ideal credit score range for home buyers:
740 or higher: This is considered an excellent credit score and will typically qualify you for the most favorable interest rates and terms from lenders.
700-739: A good credit score in this range may still allow you to secure a mortgage, but you may not receive the best rates or terms available.
660-699: This is a fair credit score range, and you may have fewer mortgage options or be required to pay higher interest rates or fees.
620-659: With a credit score in this range, considered subprime, you may face challenges in qualifying for a conventional mortgage and may need to explore alternative lending options or provide additional documentation.
Below 620: It can be challenging to obtain a mortgage with a credit score below 620, as most lenders consider this a poor credit score. You may need to work on improving your credit before applying for a home loan.
READ NEXT: 5 States With the Highest and Lowest Hidden Costs of Homeownership