What does a first-time home buyer need to understand about FICO scores? If you are interested in a home loan, you need to know what FICO scores are acceptable to the lender.
You also need to know how FICO score ranges are viewed by lenders in terms of general creditworthiness. What makes a good credit score or credit score range, and what makes a “bad” credit score range?
Investopedia says credit scores have a range between 300 and 850. What do lenders think makes a good credit score? The specific answer will depend on the lender, but as a rule of thumb consumers can count on FICO scores between 670 and 739 as being “good”. Scores above this range in the 740s to a maximum of 850 are “excellent”.
What does this mean for borrowers with FICO score ranges lower than what’s mentioned above?
In general, those with FICO scores between 580 and 699 may be eligible on paper for an FHA home loan, but it may be harder to get loan approval. A lot may depend on your patterns of credit use, payment, etc.
FHA home loans permit loan approval for maximum financing, which means the borrower is required to make the lowest down payment–3.5% down. On paper, applicants with FICO scores at 580 or higher qualify for this. But the lender’s credit requirements will also play a role in the decision–NOT just the FHA minimums.
If you have lower FICO scores, plan on working on your credit as early as possible once you have decided to look into your options for a home loan.
It is possible to improve your credit scores by paying all bills on time every time for at least a year leading up to your mortgage loan application.
You will also need to lower the balances on your credit cards well below 50% of your credit limit. You should also not apply for other new lines of credit.
We advise this because the history of your credit use including on-time payments and how low your credit card balances play a role in loan approval.
When you start saving for your home loan and planning your purchase, credit monitoring is a very good idea; it helps you avoid surprises on the way to your mortgage application.
If issues arise related to identity theft, outdated entries in your credit report, or inaccurate information on your credit report, a reputable credit monitoring service can help by providing early warning.
It takes time to improve your credit. Knowing how your lender will view your credit report can be an important factor in getting your mortgage loan approved.
You don’t get overnight results when repairing your own credit, but the time you invest in raising your FICO scores will help save you money on the loan in the form of more competitive interest rates (poor credit scores can lead to loan approval but at a higher rate) and in other areas, too.
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we’ll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner’s Insurance
Step 9: What to Expect at Closing