There’s no denying that good credit can help you get a better interest rate on a mortgage. And because your mortgage will likely be one of largest, if not the largest, debts you’ll ever incur, it’s in your best interest to get your credit in the best shape possible before you apply for one.
Having said that, you don’t always need to have sterling credit to purchase a home. You might not qualify for the best interest rates available, but you may still be mortgage-eligible even if you have average, or below average, credit scores.
Credit Score Ranges
Lenders depend on credit reports and credit scores to help predict the risk of doing business with their new applicants. The lower your credit scores, the greater the risk that you won’t pay back your loan as agreed.
Most lenders have different credit score ranges or “tiers” they set up when they evaluate the credit risk of applicants. Depending upon where your scores fall in their tiers, a lender may approve or deny your application. These score ranges also guide lenders as they set the terms of your loan, with the lowest interest rates going to the higher-score tiers.
Every lender sets its own criteria for what it considers to be bad, good, or excellent credit. For an idea of how lenders might view your score, here’s a look at the different FICO credit score ranges, according to Experian:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Very Poor: 300-579
NOTE: Experian is not lender. These ranges are approximations rather than actual ranges adopted by any particular lender.
Credit Score Requirements
Fannie Mae and Freddie Mac requirements allow lenders to extend conventional mortgages to consumers with credit scores as low as 620. With FHA loans, a credit score of 500 is technically the floor for credit approval (with a 10% down payment). However, just because lenders could issue FHA loans to people with credit scores as low as 500, it doesn’t mean they always will.
Thanks to expanded loan guidelines that lenders set up — on top of what’s already required by Fannie Mae, Freddie Mac, VA loans, or FHA loans, a lender might require you to have a 620 score, for example, to qualify for a mortgage. Every lender has different approval criteria, and it pays to shop around for your mortgage loan when you’re buying a home.
You might find a mortgage lender who will loan you money even with your lower credit scores, but that doesn’t mean the search will be easy. And if you do find a lender who will give you a loan despite your bad credit, the tradeoff will likely be a higher interest rate. You also might have to jump through more hoops to receive a mortgage approval.
How Much Will Bad Credit Cost You?
Don’t underestimate the cost of taking out a mortgage loan with a higher interest rate. Even if your rate is just one percentage point higher than it would be if your credit was in better shape, that extra 1% can add up over the course of your loan.
FICO tracks the average mortgage rates offered to homebuyers by FICO score tier. Using that data, here’s an example of how even a minor improvement in your credit score can save you tens of thousands of dollars over the life of a 30-year mortgage:
|30-Year Fixed Mortgage, $300,000 Home Loan|
|Score Range||Interest Rate||Monthly Payment||Total Interest Paid|
As you can see, that seemingly small difference of a single percentage point is financially significant. If you worked to improve your score from 635 to 660, for example — not an insurmountable leap — the effort could save you $179 every month, and over $64,000 in interest over the course of your loan.
Point being, even if you can get a mortgage with bad credit, it might be in your best interest to wait a few months, or even longer, before you apply for a loan. Improving your credit scores, even by a few points, can yield big-time savings in the long run.
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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.