To get the best rate on the market, you'll need to have a FICO of at least 760. But if your credit score is between 700 and 759, your interest rate will be just 0.2 percent higher. That means your mortgage payment on a $200,000 loan will be about $20 more per month. You'll pay about $10,000 more over the life of the loan on a 30-year fixed-rate mortgage at about 5.06 percent. The lowest interest rate for top scorers is 4.86 percent this week.
If your credit score is between 680 and 699, you can still probably find a bank that will consider you for a mortgage, but you may be able to find a better rate by applying for an FHA, VA or USDA loan. Your best best is to work with an independent mortgage broker who is not tied to a particular bank; that way the broker can find you the bank that will offer you the best deal depending on your credit score.
If your credit score is as low as 620, you may still be able to find a lender that will offer you a government-backed loan, but you'll have to do some searching. Most banks will only offer an FHA, VA or USDA loan to people with credit scores of at least 640, but some smaller banks will consider applications at 620.
Even though FHA's official rule is that you can qualify for a 3.5 percent down mortgage with a credit score as low as 580, banks are not offering mortgages to people with scores that low. If your credit score is below 620 you'll need to work on increasing your score first, as well as save more cash. If you're able to put down more than 20 percent, you may be able to find a bank that will offer you a mortgage.
So what should you do to improve your credit before applying for a mortgage?
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Step 1: Check your credit report.
Your first step should be to get your credit reports from all three credit bureaus (Equifax, Experian and Transunion). You can order them for free at the government-run website Annual Credit Report.com. This is the only website that offers free credit reports with no strings. (Other sites might offer you a free credit report but require you to sign up for monthly services.)
Step 2: Challenge any errors on your report.
When you get your report, if you see any errors follow the instructions sent with the report for correcting errors. The credit reporting agency has 60 days to respond to you and will send a corrected report. If it's still not correct, be persistent and send another letter disputing the report. You may find you need to dispute reports several times before they are correct, but it's worth the effort to improve your score.
Step 3: Reduce credit card debt.
If you're carrying large balances on your credit cards, pay them down. To get the best credit score you need a credit utilization ratio of 10 percent to 20 percent. You can calculate the ratio by dividing your total outstanding debt by your total available credit. For example if you have $2,000 of total debt on two credits cards that each has a $5,000 credit limit, your credit ratio would be 20 percent (2,000/10,000).
Step 4: Monitor your credit score.
While you're working through the process of correcting your credit reports and paying down your debt, you can check what's happening to your score for free at CreditKarma.com.
Step 5: Order your credit scores.
Once your report is accurate, you've paid down your debt and you think you're ready to apply for a mortgage, order your credit scores at myFICO.com. That way you will see what your potential lenders see. if your score is over 640, most banks will approve a VA or FHA loan. If it's below 640, you'll need the help of a specialized broker. If your score is over 680 you'll be able to consider both government-backed loans and private loans. Look at the numbers and see which one makes the most financial sense given your situation.
If your scores are too low, you may want to see if a parent or other family member will sign as nonoccupant co-signer. If you do plan to work with a co-signer, be sure to inform the broker that up front so he can steer you to the lenders that will approve a loan with a co-signer.
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