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What Credit Score Do I Need to get a Home Loan?

Shawn Von Talge



05-13-2016

Over the past several weeks we’ve been discussing the four key concepts that all prospective homebuyers should understand when seeking financing for the purchase of a home. As we first explained in this article back on April 14th, these four concepts consist of the borrower’s credit, down payment, debt-to-income (DTI) ratio, and employment/ income stability. For today’s article we will take a closer look at the concept of credit, which will include an explanation of how lenders determine your “qualifying” credit score on a home loan as well as a breakdown of the five basic things that your credit score is based on.

Firstly, as common sense would tell you, your actual credit score is the most important thing a lender is going to look at when assessing your credit. For most traditional loan programs you’ll need a minimum credit score of 620 to qualify for financing. An important thing to understand when it comes to your credit score as it relates to mortgage financing is how it’s going to be determined by the lender. As you may already know, in the United States there are three credit bureaus that provide the credit scores used by lending institutions: Equifax, Experian, and TransUnion. For the purposes of mortgage financing, your middle score as determined by the three credit bureaus is what’s used as your qualifying score. In the case that you are applying alone for mortgage financing, your individual qualifying score is what the lender will use as the qualifying score on your loan. However, if you are applying for joint financing (with a spouse, for example), the lender will then look at both of your middle scores and use the lower of the two as your qualifying score on the loan.

To illustrate how your qualifying credit score would be determined if you applied for joint financing with a spouse, consider the following example. Let’s say your credit scores are as follows: Experian (580), Equifax (670), and TransUnion (665). Then let’s suppose your spouse’s credit scores are: Experian (550), Equifax (590), and TransUnion (640). In this scenario, your individual middle score equates to 665 while your spouse’s is 590. Unfortunately in this case your effective qualifying credit score for mortgage financing purposes is going to be the 590 score, since this is the lower of your individual middle scores. As such it’s important to know the credit scores of all applicants on the loan as It doesn’t do any good if you have sufficient credit to qualify but your co-applicant doesn’t.

Now that we have a basic understanding of how a lender will determine your qualifying credit score for a home loan, what factors do the credit bureaus use to come up with your credit scores in the first place? It is a common misconception that these factors and the weight they have on one’s credit score are not divulged as public knowledge. However, the reality is that this information is readily available. Shown below are the five basic factors that go into your credit score and how much weight/impact each one has in determining your actual score:

▸ Your past payment history, which accounts for roughly 35% of your overall score
▸ Your outstanding debt, which accounts for roughly 30% of your overall score
▸ Your history of established credit, which accounts for roughly 15% of your overall score
▸ The type of credit being used, which accounts for roughly 10% of your overall score
▸ The pursuit of new credit/inquiries, which also accounts for about 10% of your score

Simply put, the credit bureaus are concerned with how you’ve paid your past creditors, how much outstanding debt you have, the length of time you’ve been carrying a credit profile, the type of credit you are currently using and what your recent track record is in terms of pursuing new credit.

Thanks for reading!

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