Okay, it’s true. I can’t say just one word about anything. But one of our Facebook followers messaged Suna and asked us to write a post about buying a first home.
While many factors weigh into the decision of whether or not to buy a home (and I’ll deal with those elsewhere), the most important criterion is your credit score. Most of us simply can’t afford to pay cash for a home, especially in hot urban markets, and lenders often use your credit score to quickly determine whether or not they want to spend the time, effort, and money it takes to process a mortgage loan application.
“Credit Score” usually refers to your FICO® score. Credit Karma explains, “FICO is an acronym for Fair Isaac Corporation, the company that developed the FICO credit scoring models that many lenders use to help accurately predict a consumer’s ability to repay a debt on time.” FICO scores range between 330 and 850. To get a score below 330 means you don’t have any credit established, and 850 is as close as we can get to perfect on the temporal plane.
While each lender sets its own lending requirements, minimum scores for mortgages are generally:
And just so you know, here’s how most lenders classify your risk factor based on your credit score:
- Very Poor. Your chances of getting any reasonable loan are fairly low. Roughly 21% of people with a credit score are bad risks.
- Fair. You are almost there. The minimum for most mortgages are at the high end of this range, which encompasses roughly 19% of credit scores. But with a little work, you can get a much better interest rate, and that could save you tens of thousands of dollars over the course of your mortgage.
- Good. This is the largest grouping of credit scores, about 30% of them.
- Very Good. This 9% gets better interest rates and more favorable terms.
- Exceptional This 12% can get pretty much what they want. Lenders like them because they are very good risks. They have the asset base to cover their loans, even if they encounter problems later.
Generally, the higher your FICO score, the more likely you are to get a mortgage at terms favorable to you. Talk to your lender about their specific requirements. If you’re on the cusp of moving into a better classification, taking the time and making the effort to do so can really save you a lot of money over the life of your mortgage.
The information on credit classifications come from Investopedia. The score distribution comes from The Motley Fool. The percentages I present for the distribution of scores are a poor attempt to reconcile the different ranges used in the two articles.
Look for an article with ideas for improving your credit score soon!