What’s the Ideal Credit Score for Home Loans?

These are tough times for many wannabe homeowners — and especially younger buyers with families. Despite discouraging headlines, homeownership is a dream that stands firm for many. It’s a great way to escape ever-growing rent prices, create permanence, and build generational wealth.

You can increase your chances of success by preparing now for your purchasing moment. In addition to monthly income, lenders look at several factors when they consider a mortgage application. Most lenders want to know your FICO® score, the most common kind of credit score.

But is there a magic number? If so, what is the ideal credit score for qualifying for a great home loan? What can you do if you want to qualify for a mortgage but are concerned your credit score is too low? The good news is that a low credit score is not permanent, and it’s one area you can start working on right away.

Know the Science Behind the Magic Number

Your credit score is a number that represents the risk a lender takes when they lend you money. Your three-digit credit score is generated from information in your credit report, but the resulting number can be the difference between you qualifying for the best mortgage rates and terms, or being saddled with less attractive financing options or, worse yet, no loan at all.

A good score can help you qualify for a home loan at the lowest possible cost. Many mortgage programs require a FICO score of at least 620 if you want to make a down payment of less than 10%. If you have some savings, you might find an FHA program that accepts a score of 580 or less. Only 3% is required for a down payment for first-time homebuyers. The higher you can raise your score, the likelier you are to get approved and the better interest rate you’ll get. Interest rates can determine whether some buyers can purchase at all. Credit scores matter!

Know Your Score and Why Matters

Not only do creditors typically check your score before they approve an application, but they also use it when determining what interest rate to charge you. Your credit score plays a critical role in the options a lender can offer. Lenders use FICO credit scores as a way to assess risk. For example, borrowers with FICO scores of at least 580 can qualify for an FHA mortgage with 3.5 percent down payment. Compare that to a buyer with a score of 500-579, for whom the FHA will require a 10 percent down payment. For conventional mortgages, lenders typically look for a credit score of at least 620 or better to qualify for a better rate and terms.^*

How to Prepare for the Biggest Purchase You’ll Ever Make

UFCU Members can obtain a free online copy¹ of their FICO score and credit report from Experian, one of three credit reporting companies that collect FICO information. If you’re on a journey to improve your credit with an endgame of buying a home, or some other large purchase, set out to accomplish these tasks every month:

1. Zero in on bills and debt. Know your debt and have a plan for reducing it.
2. Pay your bills on time, every time, for example by setting up automatic payments. Know your credit limits and keep the amounts you owe at less than 30% of those limits.
3. Choose carefully when applying for new credit because hard credit checks can lower your score. Managing a variety of credit types reliably will get you on the road to better credit. Plus, whether and how often credit inquiries are pulled for you impact your score.
4. Reduce your debt. Always know how much you owe, and avoid maxing out your available credit
5. Contact a trusted loan officer. When you’re on your way toward a healthy credit score, it’s time to talk to a loan officer about getting pre-qualified for a home loan. You might be better prepared than you think! Here are some things a loan officer can do:
   • Set a price range based on your optimal monthly payment
   • Estimate your probable closing costs
   • Evaluate your eligibility for special programs like VA, HUD, rehab loans, first-time homebuyer, Community Hero, and more
   • Recommend actions if your file is not ready to move forward
   • Clarify lender rules, for example about remote work, residency, and getting a co-signer or down-payment help from family
   • Recommend a trustworthy real estate agent
   • Provide the pre-approval letter that’s needed when making an offer

Much of the information a loan officer needs can be submitted 100% online. Even if you aren’t shopping yet, it’s a good idea to gather as much information as you can for when homeownership opportunity knocks.

UFCU Mortgage Services has been named the top mortgage originator in Central Texas for several years running! We invite you to calculate what you qualify for or apply now.

¹ Through UFCU’s partnership with myfico.com.

UFCU originates loans to purchase properties in Texas only.