The majority of potential homebuyers are wildly wrong about the credit required to obtain a mortgage for the house of their dreams. After the mortgage crisis of 2008 requirements have gotten much tougher but not as bad as many may think.

Your credit score reveals more than you probably realize; you’re spending behavior, how you manage finances, whether you make lake payments or pay on time.  Good credit will help you save money in the long run. 

When you have a higher credit score, you are able to make that big home purchase or a car, and pay it off with a lower down payment, have a lower interest rate, and make those lower monthly payments more doable, (more money in your pocket). And the way lenders view your score: higher the score, the lower the risk, impact the factors that lenders use when determining your interest rates.

Credit for a Mortgage is Different Than Credit for a Credit Card

Credit varies based off of fluctuations and several factors; your credit utilization is the amount you borrow comparative to the total amount of credit you have available, and how much you utilize your credit.  So say that dollar-wise, you owe a higher percentage of what you are allowed on your credit line, you will take a huge hit to your credit score.

And just like receiving grades on your high school report card, you will receive a credit grade based on your credit utilization.

Credit score ranges from “very poor” below 500, to “excellent” 720 – 850.

When you have a better credit score, you will have the advantages of qualifying for the better mortgage rates.  Although there are other types of loans your credit score may not always be as significant. “While many lenders use FICO Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product.

There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.” 

Based off of the best interest rates for conventional loans – Fannie Mae and Freddie Mac requires a lot of focus on whether your score is a 760 or higher.  With the Federal Housing Administration or Veterans Affairs loan, the focus is on 700 plus, and the impact of a lower score won’t be as substantial.

With a government-insured FHA mortgage, your credit score can be as low as 500. VA mortgages do not require a minimum FICO score, though lenders typically look for a score 620 or higher. And loans backed up by the Agricultural Department require a minimum credit score of 640.

The loans are more expensive as you are required to pay private mortgage insurance plus the upfront and an annual mortgage insurance premium.  To see the lenders perspective, its best looked at as though you are about to loan a friend money, and typically you will not see that money again, lenders use PMI as an insurance to protect themselves in the event you go into default.

Jumbo loans exceed conforming loan limits and are one way to buy a high-priced or luxury home.  They are imposed by Fannie and Freddie and you must ideally have a credit score of 760 or above.