Financial Advice

Understand Your Credit


What’s the Ideal Credit Score for Home Loans?

Buying your first home in a hot real estate market takes a good dose of persistence, a dash of luck, and an important magic number, otherwise known as a good credit score. But is there a magic number? If so, what is the ideal credit score for qualifying for a great home loan?

The Science Behind the Magic Number
Your credit score is a number that represents the risk a lender takes when they lend you money. Far from being something created through magic, your three-digit credit score is generated from information in your credit report, but the resulting number can be the difference between you qualifying for the best mortgage rates and terms, or being saddled with less attractive financing options or, worse yet, no loan at all.

A FICO® score is today’s most commonly used credit score. Lenders rely on at least one of the three credit reporting bureaus (Experian, Equifax, and Trans Union) to provide them with your FICO score. Each of their reports can generate different numbers. Why? That’s because they use different algorithms and models to generate their numbers, and are not always accessing the same data, as some lenders don’t report data to all three companies.

How Do You Score?
A good score can help you qualify for a home loan at the lowest possible cost. FICO scores range from 300 to 850. Generally, those with a higher score are granted credit most easily and get a better rate. Here’s how the numbers break down:

  • Poor < 580
  • Fair 580–669
  • Good 670–739
  • Very Good 740–799
  • Exceptional 800+50

The Components of Your Credit Score
Your credit score is composed of five important components that are largely within your control. Understanding these factors is the best first step to an exceptional credit score:

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of Credit History (15%)
  • New Credit (10%)
  • Credit Mix (10%)

To keep your score healthy, pay your bills on time, every time. Know your credit limits, and keep the amounts you owe at less than 30% of those limits. And only open accounts you’re sure you need.

Why Your Credit Score Matters
Not only do creditors typically check your score before they approve an application, but they also use it when determining what interest rate to charge you. Your credit score plays a critical role in the options a lender can offer. Lenders use FICO credit scores as a way to assess risk. For example, borrowers with FICO scores of at least 580 can qualify for an FHA mortgage with 3.5 percent down payment. Compare that to a buyer with a score of 500-579, for whom the FHA will require a 10 percent down payment.

For conventional mortgages, lenders typically look for a credit score of at least 660 or better to qualify for a better rate and terms.*

Consult the Mortgage Experts
If your credit score is not where you’d like it to be, the UFCU Mortgage Services™ team can help you take steps to begin improving it before you are in the new home market. Call (512) 997-HOME (4663) or (800) 476-8409 to put one of Austin’s top mortgage lenders to work for you.

* Also subject to other qualifying criteria.