When it comes to getting a mortgage your credit score is one of the biggest factors that will determine a lot about your loan options, and how your loan will ultimately go. The question that comes up most often is "Do I need good credit?" This is an extremely loaded question because so many factors will go in to your loan decision, but let's give you an easy answer because that is what you came here for - No, you do not need "good" credit, but having bad credit can prevent you from getting a mortgage. Let's dive in to what that really means for you.
Lets's first understand the credit score ranges that exist. Credit scores can range from 300 up to 850. This can vary from bureau to bureau because each company uses their own credit and scoring models. Now for you to understand what makes your score go up and down exactly would require you to have an advanced degree in some sort of neuroscience, but just remember this isn't like a golf score so the higher your number the better. Now when it comes to getting a mortgage all lenders are going to require you have a Tri-Merge credit pull, this is a type of credit pull that provides your loan officer and lender all 3 of your credit scores. The three companies that will be used to determine your mortgage credit score will be TranUnion, Exquifax, and Experian. Each of these companies will assign you a score based off of your payment history, credit usage, credit limits, and balances. For the sake of a mortgage your MIDDLE score will be your qualifying score when getting your loan.
Now that we know what ranges exist we have to understand that not all lenders will allow you to get a loan with a low credit score. In my industry experience most lenders will not even offer loan options to a borrower if their credit is below 500. So I want you to think when you are applying for a mortgage if I am under 500 I am probably not getting a mortgage. Let's assume you are in a range that would allow you to qualify, and this can vary from lender to lender so make sure you check your options. What does a lower credit score do to your loan options:
- It may not allow you to qualify for some programs. For example most conventional lenders will not allow you to get a loan below 620. Some FHA lenders will not allow you to get a loan below 580.
- It may require you to put more money down. Most lenders that lend on lower ranged credit score typically require more money to be put down. Remember all lenders are wanting to lower risk, and more money down means less risk for them.
- It may restrict the amount of debt you can hold. This can result in you needing a lower mortgage payment (less home for you) or having the need to pay debts off. Higher credit scores can allow you to get in to a loan with as much as 50% Debt to Income. While lower scores can significantly drop that.
- It may cause your interest rate to be higher. Again back to lenders and risk, they see lower credit scores as higher risk and tend to offer a lot less attractive interest rate options to borrowers.
- It may cause you to bring more money to the closing table, if you have to bring in a bigger down payment, pay off debts, and take a higher interest rate, these things are all going to result in bigger costs out of your pocket.
- It may cause the lender to ask you for a lot of documentation, and believe me when I say more documentation is not a good thing.
To wrap things up as I mentioned in the beginning you do not need good credit to get in to a mortgage but the experience you have and the costs you pay for it may not be worth it in the long run. My advice to any prospective home buyer is to know your credit, take the time to get your free annual credit report, pay for your credit scores, and monitor your reports. Knowing your credit is the most important step, it allows you to track and make sure your information is accurate. I also recommend if you have lower or bruised credit reach out to a professional that helps with credit repairs and get your credit back on track!