In a Nutshell
If you’re trying to get a mortgage, you might wonder what your FICO® scores need to be. The answer is that it depends, but generally better scores mean better loan terms for you. That’s why it’s especially important to start out with good credit scores.When it comes to getting a mortgage, there are enough numbers flying around to make any mathematician happy. Lenders will look at a number of items, which can include your credit history, your income and how much debt you have, among other things.
But one number is perhaps one of the most important numbers of all. Your FICO® scores can impact whether you get a loan or not, and if so, at what interest rate. That’s why it’s important to understand the nuances of your FICO® scores. Luckily, it’s not rocket science. Here’s the scoop on how your FICO® scores can affect your mortgage.
- What are FICO® scores, and how do I get mine?
- How do my FICO® scores affect my ability to get a mortgage?
- How can my FICO® scores affect my mortgage interest rate?
- Why is it so important to get a low interest rate on my mortgage?
What are FICO® scores, and how do I get mine?
Your FICO® scores (an acronym for Fair Isaac Corp., the company behind the FICO® score) are credit scores. It’s a sort of grade based on the information contained in your credit reports. Unlike the grades you were given in school — A through F — base FICO® scores generally range from 300 to 850. And the higher, the better.
Because there are three major consumer credit bureaus (Equifax, Experian and TransUnion), each with its own version of your credit report, you can also have different credit scores. For example, you can have a FICO® score based on your Equifax® credit report, a FICO® score based on your Experian® credit report, and a FICO® score based on your TransUnion® credit report. To further complicate things, you can also have VantageScore® credit scores from each bureau.
Additionally, FICO also creates many different credit-scoring models for lenders in different industries. So your base FICO® scores may not be the same ones a mortgage lender sees if they request your mortgage-specific FICO® scores, for example.
You probably don’t need to worry about all these nuances when buying a home, but you should still have an idea of what your scores look like. You can get your VantageScore® 3.0 credit scores (based on similar factors to your FICO® scores) from Equifax and TransUnion for free on Credit Karma.
If you want to see your FICO® scores, however, you can easily buy them online from the MyFICO website, and possibly find them for free from your bank or credit card issuer.
How do my FICO® scores affect my ability to get a mortgage?
Lending a huge amount of money is risky business. That’s why mortgage lenders need a good way to quantify the risk, and your FICO® scores — with all of the data and research that go into them — fit the bill.
Different lenders have different requirements for their loans. And because there are many different types of mortgages from many different types of lenders, there’s no one single minimum FICO® score requirement.
How can my FICO® scores affect my mortgage interest rate?
When a loan officer gets your mortgage application, they may use a pricing grid to figure out how your credit scores affect your interest rate, says Yves-Marc Courtines, a chartered financial analyst with Boundless Advice. Generally, higher scores can mean a lower interest rate, and vice versa.
From there, a mortgage loan officer will likely look at the rest of your loan application to decide whether your base interest rate needs any adjustments. For example, if you’re making a smaller down payment, you may be given a higher interest rate, says Courtines.
A bank’s pricing grid may change on a daily basis depending on market conditions. However, here’s an example of what you might expect your base interest rate to be, based on your credit score, on a $216,000, 30-year, fixed-rate mortgage.
| FICO® score range | Interest rate |
|---|---|
| 760–850 | 2.36% |
| 700–759 | 2.59% |
| 680–699 | 2.76% |
| 660–679 | 2.98% |
| 640–659 | 3.41% |
| 620–639 | 3.95% |
Source: myFICO, November 2020.
Why is it so important to get a low interest rate on my mortgage?
You probably already know that a lower interest rate means a smaller monthly payment. But do you know just how big of an effect a smaller monthly payment can have?
Let’s look at an example. According to the U.S. Census Bureau, in March 2018 the average sales price of a new home sold in the United States was $366,000. If you were to go to the closing table with a 20% down payment and opted for a 30-year fixed-rate mortgage, here’s how much it would cost you over time depending on your interest rates.
| Interest rate | Monthly payment | Amount paid each year | Amount paid over life of loan | |
|---|---|---|---|---|
| 5.76% | $1,711 | $20,532 | $615,802 | |
| 4.17% | $1,427 | $17,124 | $513,619 | |
| Difference | $284 | $3,408 | $102,183 |
In this example, boosting your credit before you get a mortgage could save you $284 per month, $3,408 per year, and $102,183 over the life of your loan! What would you do with all of that extra cash?
Pro tip: Use our credit score simulator to learn more about what could impact your credit scores.
Bottom line
Your FICO® credit scores are important factors that can affect your ability to get a mortgage. It’s like a pizza crust: Sure, other toppings are important (like marinara sauce, cheese and pepperoni), but many believe it’s the crust that makes the pizza.
If your base credit scores aren’t very good, you may end up with a mediocre cardboard-crust school-cafeteria pizza (or a pricey mortgage, in this case … so it might be a good idea to try to improve your credit beforehand). But if you have higher credit scores, you may be able to get the mortgage equivalent of an artisanal wood-fired pizza. Which one would you choose?