If you want to get a mortgage this year, you need a credit score of at least 620. But if you want the best interest rate, the threshold increases to 740. These are the two primary benchmarks that homebuyers need to be aware of, says James Adair of Portland, OR's Aspire Mortgage Group.
While lending standards have increased over the past six years, this range shows that qualifying for a mortgage is still well within reach of many Americans. According to estimates, for example, approximately 75% of the U.S. adult population has a credit score above 650.
But making the cut is only the table stakes. The big difference concerns how much your mortgage will cost. And your precise credit score does have an impact on this.
Take a look at the following table. This is a matrix that mortgage brokers use to determine how many points someone will be charged for a home loan based on their credit score and the size of their down payment (a point is a form of prepaid interest; one point equals 1% of the loan amount).
Starting in the top left, let's say your credit score is 750 and you put 35% down on your house, translating into a loan-to-value ratio of 65%. As I've depicted with the number "1," you wouldn't owe any points. That's great!
Now, let's say that your credit score is 690 and you put only 17% down, equating to a loan-to-value ratio of 83% -- see number "2." In this case, you'd owe one and a half points. If you were getting a $200,000 mortgage, in other words, you'd have to prepay $3,000 in interest or agree to a higher interest rate over the life of the loan.
Finally, if your credit score just makes the cut at 625 and you put only 4% down on the house, you'd be assessed three and a half points -- see number "3." On a $200,000 loan, this would come out to be $7,000.
The lesson here is simple. If you want to get a mortgage, the chances are good that you can do so, as your credit score needs to be only 620. But after that, both a higher credit score and larger down payment decrease the cost of your mortgage. It's primarily for the latter reason, in turn, that protecting your credit score is so important.
To discover how easy it is to boost your credit score, check out the following brief presentation.