Published in: Popular | May 27, 2020

For Homebuyers, a Good Credit Score Is More Important Than Ever

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It's no secret that an excellent credit score is important for mortgage applicants. When lenders offer home loans, they take on a fair amount of risk, and mitigating that risk boils down to choosing creditworthy borrowers with a track record of paying bills responsibly. 

Still, you don't need outstanding credit per se to get a mortgage. For a conventional loan, the minimum credit score requirement is 620, which, according to FICO, is only considered "fair." But, thanks in large part to the uncertainties of the COVID-19 crisis, that may be changing. 

Mortgage lenders are buckling down 

The COVID-19 crisis has already had a huge economic impact on the U.S. Millions of Americans have lost their jobs, and countless small businesses have been forced to close their doors. But new mortgage applicants could end up being victims in all of this mess, since data from the Urban Institute reveals that lenders are getting stricter in their borrowing requirements, and are penalizing applicants with lower credit scores, sticking them with higher rates. 

As of March 2020, applicants with credit scores of 720 and above secured mortgage rates as many as 78 basis points lower than those with scores of 660 or below. To put that into context, based on going rates for a 30-year fixed $200,000 mortgage, a borrower with a score of 660 or below would have a monthly payment nearly $100 more per month than someone with a score of 720.

Of course, the concept of borrowers with lower credit scores paying more for their mortgages than those with stronger credit is hardly new. What's notable, however, is that the spread between lower and higher credit scores is much higher now than prior to the COVID-19 crisis. 

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Not only that, but some lenders are imposing tighter requirements for mortgage eligibility. JPMorgan Chase, for example, has mandated credit scores of at least 700 and minimum down payments of at least 20% for most mortgage customers. And since JPMorgan Chase is among the dominant mortgage originators, there's a good chance other lenders will follow suit.

If this is at all reminiscent of the Great Recession of 2007 to 2009, you're not imagining things. Following that period, lenders tightened requirements so that borrowers with decent -- but not spectacular -- credit struggled to get approved for mortgages. In the years since, those guidelines have loosened, but with a major economic crisis on our hands, securing a mortgage could once again become a trying task. 

Set yourself up for mortgage approval

Different lenders are apt to have different credit score requirements when it comes to giving out mortgages in the coming months, but one thing's for sure -- the higher yours is, the greater your chances of getting approved. And there are a few things you can do to boost your credit score:

  • Pay all of your incoming bills on time. Your payment history is the single most important factor in determining your credit score, so if you establish a pattern of timely, responsible bill-paying, you'll be rewarded with a higher number.
  • Pay off some existing credit card debt. The more revolving credit you use at once, the higher your utilization ratio climbs. A utilization ratio above 30% could bring your score down, so if you have existing balances on your credit cards, paying them off could lower your utilization and raise your score.
  • Check your credit reports for errors. You're entitled to a free copy of your credit report every year from each of the three major reporting bureaus -- Experian, Equifax, and TransUnion. Reviewing those reports for mistakes that work against you and correcting those errors could improve your credit score quickly. 

Though your credit score is only one factor lenders use to determine whether you qualify for a mortgage, it's an important one to work on. Borrowing requirements tightened up following our country's last widespread financial crisis, so there's a good chance that will happen again. Be prepared so you don't wind up frustrated when the time comes to purchase a home.

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