So you’re ready to buy a property—do you know your credit score and how it affects you?
What’s a credit score, and how is it calculated?
A credit score Is a number used to measure the extent of someone’s ability to borrow money responsibly. An individual’s credit score will range between 300 and 850. The higher the number is, the more likely it is that creditors will loan money to that person. Credit scores are sometimes interchangeably called “FICO scores”, which refers to the Fair Isaac Corporation. FICO is the “credit score” that lenders are looking at 90% of the time. Experian, Equifax, and Transunion—the three major credit reporting bureaus in the United States—all use the FICO proprietary model to calculate their respective scores. Your FICO score is calculated by the following factors:
- Payment history (35%): Indicates whether or not a borrower pays their debt back on time.
- The amount owed (30%): Using too much credit could indicate to lenders that you’re overextended and more likely to default.
- Length of credit history (15%): Having a longer borrowing history will raise your credit score over time.
- New credit (10%): Opening multiple lines of credit in a short period of time will lower your score.
- Type of credit used (10%): Includes the variety of loans you’ve taken out like student loans, car loans, credit cards and mortgages.
Why do you need good credit to get a mortgage?
Buying a house is a major investment. For many people, it’ll be the biggest investment that they ever make. Therefore it’s important to have a good credit score when you’re applying for a mortgage—the higher the score, the more money the bank will lend you. Your credit score will also affect the interest rate you’re offered by the bank. To get a good rate, you’ll need a good score.
What’s an ideal credit score to buy a property?
The highest credit score that you can possibly have is 850, and the closer you are to that number, the more options you’ll have. The following list is what you can expect to get when applying for a mortgage, based on the range of your credit score:
740-850
You’ll get the best interest rates available, and you’ll also be eligible for great rates on private mortgage insurance (PMI), which is typically taken out if your down payment is going to be lower than 20%.
700-739
Still good, and can still get you approved for a large mortgage at a good rate.
620-699
You can still get conventional mortgages (loans not backed by the federal government) with a score in this range, which allows for lower down payments and has other benefits.
580-619
Credit scores in this range typically qualify you for federally-backed FHA mortgages with down payments as low as 3.5%. If you’re a veteran of the U.S. military, this is also the minimum score range that will get you qualified for VA home loans.
500-579
You can still qualify for an FHA loan in this range—but be prepared to make at least a 10% down payment. At this score, most lenders will require any liens, judgments, or collections to be paid in full before providing a loan to the borrower.
300-499
A score in this range means that you either have no credit or really bad credit, which means that you likely won’t get approved for any mortgage.
For example, as of 2020, the median price for a home in Chicago is just under $300K. This means that with higher credit scores, you could be looking at a new home with an attractive interest rate for as little as a $10K down payment. However, if your credit score is lower, be prepared to pay much more in interest over time, and have at least $30K (if not $60K) on hand for a down payment in the same scenario.
How your credit score affects the interest rate offered to you
There are many factors that can affect the interest rate offered to you when applying for a mortgage—such as the location you’re trying to buy the property and what type of property you’re interested in buying. However, your credit score is crucial to this calculation. Current interest rates for mortgages on a single-family home if you have a high credit score are hovering around 3%. Below is a table that includes interest rates you might expect if you were trying to buy a median-priced home in Chicago with a 20% down payment at a 30-year fixed rate:
| FICO Score | APR | Monthly Payment | Total Interest Paid |
| 760-850 | 2.733% | $978 | $111,943 |
| 700-759 | 2.951% | $1,006 | $121,987 |
| 680-699 | 3.124% | $1,028 | $130,069 |
| 660-679 | 3.334% | $1,056 | $140,013 |
| 640-659 | 3.756% | $1,112 | $160,426 |
| 620-639 | 4.292% | $1,187 | $187,163 |
Want to see for yourself? There’s a calculator on FICO’s website that will tell you how much money you’ll save (or lose) on interest payments depending on whether or not your current credit score goes up or down.
Tips for raising your credit score before applying for a mortgage
There are tons of ways to improve your credit. The first step is to actually find out what your score is and look at the report itself. Sometimes, your score drops due to errors and factual inaccuracies in your report. Common report errors include:
- Clerical mistakes that attribute other people’s debt to you.
- Accounts being included in a report twice, making your number of open lines of credit seem higher than it should be.
- Bad debts that are older than seven years remaining on your report.
- Identity theft.
- If you’re divorced, your ex’s debt should be removed from your report.
It’s important to fix these mistakes immediately. Each of the three credit bureaus have their own processes for dispute, links to which are provided on the FICO website. If your credit score is low due to an actual bad credit history, there are still ways to improve your credit over time:
- Consistently pay your bills on time.
- Only take out new credit cards when you really need to.
- Asking for higher credit limits on existing cards.
- Becoming an “authorized user” on other people’s credit cards that have good scores.
- Keeping balances on your current credit cards low.
Lastly, if you’re shopping for a big loan, you’ll want to do this within a 30-day period. This will ensure that you’ll only have one “hard credit inquiry” on your account instead of several, which lowers your score.
Ways to get approved with bad credit
Even if you have a low credit score, there are a couple of ways you can still get a mortgage:
- In addition to FHA and VA loans, there’s loan programs available for people with low scores by Fannie Mae and Freddie Mac.
- Looking at first-time buyer programs.
- Shopping around for different rates.
- If you have cash on hand, making a sizable down payment.
However, if your score is below 500 and you still really want to buy a home, you should maybe have a friend or relative with a better credit score buy the house for you and add you to the title. In that case, you can refinance the loan under your name after your credit score improves.
Does buying a house affect your credit score?
Yes—but the short-term and long-term effects of getting a mortgage are different. Your credit score will at first go down after you buy a home. A “hard credit inquiry” will lower your score, which is what takes place when lenders are determining what kinds of loans and interest rates they can offer you. Furthermore, actually getting the loan after the inquiry will cause your score to drop further, because the amount of overall debt you have will greatly increase.
In order to prevent further drops once you have a mortgage, it’s a good idea to not apply for too many credit cards or run up high bills on them. It’s also crucial to remember to pay existing bills on time. That said—if you make your mortgage payments on time consistently, it will greatly increase your score in the long run. Holding on to the equity in your home once you have it will also help your credit score.