What is considered a good credit score these days? This is one of the most common questions we receive from our readers. And as we replace our 2010 calendars with new ones for 2011, this question will surely see a spike in frequency again.
So, in anticipation of all those emails, I thought I’d share my own definition of a good credit score in 2011:
Looking Back: A Credit Score History
Are credit scores really that important for home buyers? Yes. In fact, they are more important today than at any point in the last decade. If you bought a home in 2003, for example, your credit score would not have weighed as heavily toward the lender’s final decision. If you had good income and a decent down payment, you would’ve been approved for a loan — even if your credit score was lackluster.
Things have changed. In 2011, your credit score has the power to make or break the mortgage approval, all by itself. Lenders (and investors in the secondary mortgage market) are putting more emphasis on credit scores as a risk-management tool. So you can bet it’s one of the first things they’ll review when you submit your mortgage application. We’ve reverted back to an era of sensible lending, for the time being anyway.
So What’s a Good Score in 2011?
Let’s talk goals before we talk numbers. As a home buyer, you have two mortgage-related goals. You want to get approved for the loan, obviously. But you also want to get a decent interest rate, meaning a rate that’s close to the current national average.
So by that definition, a good credit score in 2011 is one that helps you qualify for a mortgage loan with a relatively low rate — your two primary goals as a borrower.
So let’s talk numbers. What does it take to qualify for a loan in 2011, from a credit standpoint. Consider the following. Traditionally, FHA loans have been the best option for people with weak credit. These are government-insured loans, so the credit-score requirements are generally lower than those for a conventional / non-government-insured loan.
In 2011, the minimum allowable credit score for an FHA loan is 500. If you want to qualify for the 3.5% down payment program, you’ll need a score above 580 (related story).
But here’s the rub. Both of these numbers (500 and 580) are basically moot, because the lenders who make these loans will require even higher credit scores. Bloomberg news recently reported that Bank of America and Wells Fargo, the two biggest mortgage lenders in the U.S., have raised their minimum credit-score requirements from 620 to 640 for some FHA loans. Other FHA-approved lenders will likely require a score of at least 620 for approval.
So, for the most part, the FHA’s minimum requirements don’t really matter. You still have to go through a lender, and they have higher minimum requirements.
What about conventional mortgage loans, those that aren’t backed by the government? Historically, it has been easier to obtain an FHA loan than a conventional mortgage. So if most lenders are requiring a credit score of 620 or higher for FHA, you can bet they’re doing the same thing for conventional — at a minimum.
Other Qualifying Factors
Credit scores are important. But they’re not everything. Your income and debt levels are equally important. If you don’t have enough income for the size of loan you want, you won’t get approved. Also, if your current debt obligations are eating up too much of your monthly income, you’ll hit a snag. But those are subject matter for another story.
Here’s what it all boils down to:
If you want to qualify for a home loan in 2011, you’ll need to have stable income, manageable debts, and a good credit score. But the definition of “good credit” has been reset to pre-housing-boom levels. A good credit score in 2011 can best be defined as a FICO score of 620 or higher. This doesn’t mean you couldn’t get approved for a loan with a score below that level. It’s possible. This is just the nearest we can come to a hard definition for a soft target.