Whether you are planning to buy a house right now or it's still a few years off, what you do with your credit today can have a big impact on your mortgage. Home lenders look at your job, your income and your credit to determine whether to offer you a mortgage. Given that both good and bad information can stay on your credit report for seven or more years, what goes into your score today will impact you for a long time to come.
Getting the Best Rates
Mortgages that aren't government backed typically tie your rates to your credit score. The better your credit is, the better you look to the lender, and less it will usually charge you for interest. Depending on whom you ask, your score should be above 740, 760 or 780 to get the best possible rates. Generally, having a score that is too high won't hurt you, though.
As of November 2013, conventional mortgages are available with FICO scores as low as 620. However, the lower your score, the more you'll pay. For example, according to November 25, 2013, data from MyFICO, a borrower with a 770 credit score will pay 3.977 percent for a 30-year fixed mortgage. Dropping down to a 690 score raises the rate to 4.376 percent, while a borrower with a 620 score will pay 5.566 percent.
One of the benefits of a government-supported mortgage like a Federal Housing Administration, Veterans Administration or Department of Agriculture Rural Development mortgage is that the credit standards are more lax. Typically, you pay the same rate regardless of what your score will be. The USDA doesn't have a minimum score, but lenders frequently like to see a 660 score or higher. VA and FHA loans also don't technically have a minimum, but it can be hard to get one with a score below 620.
Managing FICO Scores
Regardless of whether you're planning to buy a house soon or in five or six years, building a good FICO score can start today. According to Fair Isaac Corp., always paying your bills on time will help as will using as little of your credit limit as possible while still showing some activity. Another strategy is to leave cards open even when you're done using them so that you can build credit history and show a higher unused credit limit.
- MyFICO: How Long Will Negative Information Stay on My Credit Report?
- Bankrate: How Credit Scores Impact Your Mortgage Rate
- MyFICO: Your FICO Score Determines Your Rate When Refinancing
- Bloomberg: Credit Score Zealots Pursue Fool’s Errand
- Veterans United Home Loans: VA Loans and Credit Score Minimums: What All Buyers Need to Know
- MyFICO: How to Repair Credit and Improve My FICO Credit Score
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.