How your credit score affects your mortgage

When buying a home, your credit score plays a significant role in determining how much you can borrow. A higher credit score will make it easier to qualify for a mortgage and can get you a lower interest rate. That’s because a higher credit score suggests to lenders that you’re a low-risk borrower. It will be more challenging to qualify for a mortgage with a lower credit score, and the loan you are offered may have a higher interest rate.

What is a credit score, and how is it calculated?

A credit score is a three-digit number ranging from 300 – 850. It’s based on the information in your credit report and reflects the likelihood that you will repay any money you borrow.

In the U.S., the FICO^® Score is the most common credit scoring system, though VantageScore® also is used. The major U.S. credit bureaus – Equifax®, Experian®, and TransUnion® – use these formulas to calculate your credit score based on your credit history.

Here are the factors used to calculate FICO® scores, along with how each is weighted.

• Payment history (35%): This is based on how consistently you’ve paid your bills in full and on time. It’s the most important credit score factor.
• Amounts owed (30%): This is how much of your available credit you are using. The less you need to use your available credit, the better.
• Length of credit history (15%): This is how long you’ve had credit accounts. It weighs the age of your oldest account and the average age of all your accounts.
• Credit mix (10%): This reflects how diversified your credit use is. It’s better to have a mix of credit cards, retail accounts, installment loans, finance company accounts, and a mortgage than multiple credit cards. 
• New credit (10%): This measures how many credit accounts you’ve opened in the past year. Acquiring a lot of credit in a short time suggests to lenders you may have trouble affording your bills. 

Why do lenders look at your credit score?

To lenders, your credit score and mortgage rates are connected. Lenders look at your credit score to gauge how likely you are to repay a loan on time and in full. Mortgage lenders also look at your income, the size of your down payment, and your existing debt load. 

Your credit score plays an important role for lenders deciding whether to approve your mortgage application. A lender may deny you a mortgage or charge you a higher interest rate if you have a low credit score that suggests you’re a more risky borrower.

In contrast, a high credit score can help you qualify for a mortgage with better terms. It also can give you leverage to shop around for the best loan offer. This can save you from having to buy mortgage points to get an affordable interest rate.

Keep in mind that not every lender uses credit scores from all three credit bureaus. For example, some may use only TransUnion®, while others only use Experian^® or Equifax^®. This could lead to minor discrepancies in your credit score from each bureau.

What credit score do you need to get a mortgage?

The minimum credit score to buy a house with a mortgage varies because different loan types have different requirements. 

Note that these minimum credit scores are generalizations. Some lenders may have different requirements from what’s listed above. For example, Rocket Mortgage® requires a credit score of at least 580 for FHA loans.

When lenders may accept a lower credit score

While a lower credit score can limit your borrowing options, it’s still possible to get a mortgage.

You can compensate for a low credit score with substantial savings, a strong income, or you can apply with a co-signer who has a high credit score. If you’re applying for a second mortgage or refinance, having a lot of home equity also can overcome a lower credit score. 

Mortgage types where credit matters less

Government-backed loans help specific borrowers buy a home and tend to have more lenient credit requirements for those who qualify. 

The most common government-backed loans are: 

• Federal Housing Administration loans, for borrowers with lower credit scores
• Veterans Affairs loans, for military personnel, veterans and their surviving spouses
• U.S. Department of Agriculture loans, for low- to mid-income borrowers buying a home in specific rural areas. Rocket Mortgage currently does not offer USDA loans.

Because the government guarantees these loans, the lender takes on less risk in providing them and can offer competitive interest rates to eligible borrowers.

How to improve your credit score

To increase your credit score, do the following:

• Lower your credit utilization ratio. Pay down any outstanding credit balances, including credit cards, but don’t close any accounts.
• Correct any credit report errors. Get a free copy of your credit report at AnnualCreditReport.com and correct any mistakes you may find.
• Diversify your credit mix. Make sure you have a mix of credit types on your credit history. 

Already have a good score?

If you already have a good credit score, here’s how to maintain it:

• Pay your bills on time. Set up autopay or reminders to ensure you never miss a payment.
• Don’t close old accounts. Unless you have a strong reason to close an account, keep your oldest account open to maximize your credit history.
• Avoid applying for new credit. Opening too many new accounts in the months before applying for a mortgage can reduce your credit score.

FAQ

Here are answers to common questions about how your credit score affects your mortgage. 

Can I get a mortgage with a low credit score?

Yes. FHA loans in particular are designed for borrowers with a lower credit score. While you may qualify for a mortgage with a lower credit score, you may need to pay a higher mortgage rate, make a larger down payment, or accept other terms that may make the loan more expensive. 

Will I get a better interest rate if I have a higher credit score?

Yes, borrowers with a higher credit score typically are offered lower interest rates.

Which credit score is most important when buying a house?

Most home lenders pull FICO^® scores from the three major credit bureaus: Experian^®, Equifax^®, and TransUnion^®.

What’s the minimum credit score needed to buy a house?

While there isn’t a universal credit score requirement to buy a house, most conventional loans require a score of at least 620, and FHA loans can accept borrowers with a score as low as 500.

The bottom line: Your credit score affects your mortgage rate, but you have options

Your credit score plays a major role in determining your mortgage rate and mortgage options overall. A higher score can unlock lower rates and better terms, while a lower score may lead to a higher rate, stricter terms, or not qualifying for a home loan at all. With the right strategies, you can improve your credit score and position yourself for better mortgage options. 

If you’re ready to see what kind of mortgage your credit score can get you, start the approval process today with Rocket Mortgage^®.