You'll Need a 720 Credit Score (or Higher) to Get the Best Rates on Your Loan
You visit a mortgage lender's website and see a splashy headline on the home page. It says they are offering interest rates as low as X percent for a 30-year fixed mortgage. But what they don't tell you is that you will need a credit score of 720 or higher to qualify for this offer.
That's just for starters. You'll also need to put a certain amount of money down. Your debt-to-income ratio will have to be below a certain level. And you might even have to pay points at closing to qualify for the lender's best mortgage rates.
Welcome to the world of bold promises and fine print, the world of mortgage lending!
In this article, I want to focus on the credit score side of things. We will talk about a certain number you're bound to see again in your research -- the 720 credit score.
The FICO Credit Score in a Nutshell
Let's set the stage before we go any further. There are several different kinds of consumer credit scores. The one you'll hear about most often is the FICO score. You hear about this one a lot because it's the credit score used by most lenders and creditors. The FICO scoring range goes from 300 to 850, with a higher number being better.
A person with a credit score of 720 is toward the upper end of the scale. This will help them qualify for a mortgage loan.
Whether you realize it or not, your score is a direct result of your own actions. When you borrow and repay money, it gets reported to the three credit-reporting bureaus that operate in the United States. The companies are TransUnion, Equifax and Experian. They collect information about consumers like you and me, and then they deliver it to creditors who use it to evaluate us.
The credit score shows creditors how you have borrowed and repaid money in the past. If you're good about paying your bills on time, you should have a fairly high credit score, perhaps a 720 or higher. If you have a habit of missing payments (or worse, a history of debt collections, bankruptcies and other negative events), you will have a lower score.
Now you can see why mortgage lenders care so much about this three-digit number. It's the best indicator they have of how "risky" you are, as a borrower. A higher number indicates a lower level of risk -- the kind of borrower lenders and creditors love. A lower number suggests a greater likelihood of default (failure to repay the loan), and therefore a higher risk to the lender.
A credit score of 720 or higher is generally considered very good or excellent by mortgage lenders. People with scores in this range will typically have a history of responsible borrowing.
Why Is 720 Such a "Popular" Number?
If you do a Google search for "FICO credit score," you'll find millions of results. There's certainly no shortage of information on this subject. As you wade through all of those articles, blog posts and news stories, you'll see the 720 credit score come up a lot.
Historically, this number has represented the point at which you would qualify for the best mortgage rates available. There is some merit to this, but it's not a hard-and-fast rule.
In reality, there are many variables at work here. Different lenders have different standards and practices. And they don't just consider your credit score. They look at a broad range of factors when making their lending decisions.
With that being said, the borrower's FICO score is one of the leading factors that will determine the interest rate -- not to mention the approval or rejection. A FICO score of 720 or higher is generally considered a good credit risk for the lender. So they are willing to offer such borrowers a better / lower rate on the loan.
Note: There's a difference between the score needed for mortgage approval, and the score you would need to qualify for the lender's best rates. You could probably get approved for a mortgage with a FICO 620, and possibly lower. But you won't qualify for the lowest rates in that range. When I refer to the 720 credit score in this article, I'm specifically talking about the score needed to get the best rates. Please keep this distinction in mind as you continue reading.
In recent years, the trend has moved upward. Today, some lenders will reserve their best rates for borrowers with scores of 740 or higher. This coincides with the general tightening of credit we have seen since the housing crash that began in 2008. Lenders have higher standards today than they did during the housing bubble. And that applies to your credit score as well.
Other Factors for Mortgage Approval
Your FICO score is important. We've covered that much already. But it's not the only factor that comes into play during the mortgage-application process. Here are some other requirements you should be concerned with...
- Debt vs. Income: A credit score of 720 will certainly help you qualify for a home loan. But if you're carrying too much debt in relation to your income, you could still be turned down. You can learn more about the all-important DTI ratio in this article.
- Down Payment: How much money do you have to put down on your loan? Unless you use the VA or USDA loan programs, you'll have to put at least 3.5 percent down. This is the minimum requirement for an FHA mortgage. If you use a conventional loan to buy a house, the minimum increases to 5 - 10 percent of the purchase price. Learn more
- Cash Reserves: Some lenders will want you to have extra money in the bank, enough to cover your first few mortgage payments. It might be two months worth of payments, it might be six months, or it might be nothing. Some lenders impose these requirements while others do not. I just want to put it on your radar. Learn more
Conclusion: You will probably need a credit score of 720 or higher to qualify for the best mortgage rates. Just remember that there's a big difference between qualifying for a mortgage and getting the best rate. A borrower could get approved for a loan with a FICO score in the 600 range. But if you want to get the lender's lowest rate, you'll need a higher score. This trend has moved up in recent years. Some lenders will only offer their lowest rates to people with a FICO number above 740. It varies from one mortgage company to the next.
Disclaimer: Nothing in the lending industry is set in stone. Not when it comes to credit scores, anyway. So don't take anything you've read in this article as the final word. There are exceptions to every rule. They only way to know for sure if you can qualify for a mortgage loan is to apply for one. Anything short of that is conjecture. With that being said, we have made every effort to ensure the accuracy of this article.Yes, it can hurt