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Credit Scores Learning Center
Welcome to our Credit Score Learning Center—where you'll find the information you need to understand how credit impacts your ability to qualify for a mortgage. Learn how scores are calculated, what lenders look for, and how to improve your credit for better loan options.
Common Factors Affecting Your Credit Score
There are several different credit scoring models used in the United States that weigh factors differently. For this purpose, we will be discussing the FICO® scoring system. Check out Experian® for additional information on how these factors impact your credit score.
Payment History (35%)
Payment history is the heaviest-weighted factor in the FICO® scoring method. Making debt payments on-time is the most beneficial thing you can do to keep your score high or to improve it. Even one late payment can significantly lower your score.
Length of Credit History (15%)
The FICO® method evaluates your credit experience by measuring the age of your oldest account, your newest account, and the average age of all your accounts. Closing accounts or paying off accounts halts payment history, but the ages of these accounts can still be used in determining your length of credit history.
New Credit (10%)
Applying for new debt can impact your score in the short-term. Which type of credit you are applying for depends on how much it's impacted. FICO® sees rate shopping for installment loans in a two-week window as one inquiry, so it will only ding your score a few points. As for revolving debt, FICO® sees each inquiry separate so if you apply for multiple credit cards in a short span of time, your score will be impacted more.
Credit Utilization (30%)
The next largest factor in the FICO® scoring method is the total amount of debt you owe based on your credit limit. To calculate, divide your total outstanding balances by your total credit limit and multiply by 100. A good credit utilization you should aim for is around 30%.
Mix of Credit (10%)
There are different types of credit, such as installment debt (i.e. mortgages, car loans, and student loans) and revolving debt (i.e. credit cards, HELOC's). Successfully managing both types of credit can help boost your score.
New Credit (10%)
Payment
History (35%)
Mix of Credit (10%)
Credit
Utilization (30%)
Length of Credit History (15%)
Qualifying Mortgage Credit Scores
Your qualifying credit score to obtain a mortgage loan depends on the loan type. Some loan types require higher credit scores, while others allow for more flexibility. Let's discuss each loan type and the minimum credit score you will need to qualify for that loan.
Conventional Loans: 620
The minimum score you will need to qualify is a 620. However, conventional loan interest rates get higher the lower your credit score is. Conventional loan interest rates tend to increase every 20 point increment once you are below a 780. Credit scores of 780 or higher will obtain the best rates and terms available. If your credit score is below a 700, you might look into an FHA loan as it may provide you more favorable terms.
FHA Loans: 580
The minimum score you will need to qualify is a 580. Unlike conventional interest rates, FHA interest rates are not as heavily impacted by your credit score. That means a borrower with a 630 credit score will likely get the same FHA rate as a borrower with a 690 score. FHA loans allow for more flexibility in credit scores, making home buying attainable for a greater number of people.
VA Loans: 620
The minimum score you will need to qualify is a 620. However, lower credit scores may be accepted if compensating factors are present. These factors can include having minimal debt, having substantial liquid assets leftover after your down payment and/or closing costs, or having a high residual income (income leftover after housing expenses.)
USDA Loans: 620
The minimum score you will need to qualify is a 620. Keep in mind that USDA loans are only available for properties in rural areas, and there are household income limits affecting how much money you can borrow.
Jumbo Loans: 660
The minimum score you will need to qualify is a 660. Jumbo loans have the highest minimum credit score requirement because they are large loan sizes, meaning they carry more risk to the lender. Scores higher than 660 may be required depending on your down payment amount, loan size, loan purpose, and occupancy type.
Understanding Credit Score Ranges
Credit scores are reported by the three national credit repositories (Experian®, Equifax®, and TransUnion®) and range anywhere from 300 - 850. Credit scores can be broken down into five ranges, and the range your score falls in will affect which loan type you qualify for and the interest rate you will pay. For mortgage qualifying, the middle (of 3) scores from the lowest-scoring borrower will be used to qualify for the loan. Let's breakdown those credit score ranges and what that will mean for you when you apply for a mortgage.
Excellent: 780 - 850
If your qualifying credit score falls in this range, you have proven that you manage debt extremely well, make on-time payments, and have low credit utilization. Lenders will see you as very low risk when considering extending credit to you. You will be able to qualify for all loan types, and you will receive the best rate and terms available.
Good: 700 - 779
With a credit score in this range, you have displayed solid financial habits. You maintain low credit balances and rarely have had any late payments, if any. Lenders view you as low risk when offering you credit. You will be able to qualify for all loan types, and you will be offered competitive rates and terms.
Average: 660 - 699
If your qualifying credit score fits this range, you may make late payments more frequently, and have high credit utilization. Lenders will see you as a moderate risk. You will be able to qualify for most loan programs, however, you might receive slightly higher interest rates.
Fair: 620 - 659
With a qualifying credit score falling in this range, you may have experienced some credit challenges in the past or have limited credit history. You may have missed some payments and have high credit balances. Lenders will view you as a higher risk, so you may have to make a larger down payment if you want a lower interest rate. FHA financing is very popular among borrowers with credit scores in this range as it enables them to make a smaller down payment and still receive low interest rates.
Poor: 300 - 619
If your credit score falls in this category, you will have a difficult time qualifying for a mortgage. Scores in this range may reflect a history of serious credit issues, such as defaults, collections, or bankruptcy. You will usually need to improve your score before qualifying for any type of mortgage loan.
780+
700+
660+
620+
<620
Excellent
Qualifies for the best terms and rates.
Good
May have small rate adjustments.
Average
Qualifies for most programs.
Fair
May need FHA financing.
Poor
May have difficulty qualifying.
First-Time Home Buyer Programs
We will review and discuss the first-time home buyer programs that best fit your financial needs.
Program Qualification Requirements
We can discuss your particular financial picture to prepare you for the documentation and underwriting requirements specific to your situation.
Home Buying Budget
One of the most important parts of the homebuying process is to determine your home buying budget. We can talk real numbers in regards to down payment and monthly house note.
Ways to Improve Your Credit Score
It can be challenging to know where to start if you are trying to increase your credit score. Everyone has a unique financial situation, so the steps you need to take to boost your score might be different from someone elses. Keeping that in mind, let's talk about several ways you can increase your score, and how long it will take to start noticing changes in your score. Check out Experian® for more in-depth information on ways to improve your credit score.
Make Your Payments On-Time
Paying back your debt on-time is going to be the most impactful way to improve your credit score as it is the heaviest-weighted factor that affects your score. If you have trouble paying debt on-time, it is a good idea to set up autopay for at least the minimum amount. This will ensure your payment is always on-time, and you won't have to give it a second thought!
There are also services such as Experian Boost® that you can register for and give you credit for payments that aren't typically reported to any credit bureau. These are payments such as utilities, cellphone, eligible rent, insurance, and even some streaming subscriptions. Getting these payments on your credit report and paying them on-time can potentially help improve your score as well.
As you start to make on-time payments for all your debts consistently, your score will start to steadily rise in about 3 - 6 months. The more time you separate yourself from those late payments, the less the late payments will be impacting your score.
Lower Your Credit Utilization
Your credit utilization is the percentage of available credit you are using on revolving credit accounts. The most common type of revolving credit that most people have is a credit card. Your credit utilization is the second-largest factor affecting your score.
In order to lower your credit utilization rate, you will need to pay down revolving debt that has high balances. A good rule of thumb is to keep each of your revolving debt balances below 30% of the limit, but aim to keep it as low as possible.
If you have low credit limits and pay your debt in full each month but still have a high credit utilization, try making multiple payments throughout the month in order to keep your balances low. You can also try paying in full before your monthly statement is issued.
Credit card companies usually report your payment information to the credit bureaus once a month. You should start seeing your score improve in about 3 - 6 months. Stay consistent on keeping your credit balances low on your revolving debt, and your credit score will continue to improve if a high credit utilization rate was weighing your score down.
Keep Your Accounts Open
Loans are typically closed once the debt is paid off, but you can leave credit cards open forever. The length of your credit history makes up about 15% of your credit score. It is measured by the age of your oldest account and the average age of all your accounts.
Even if you no longer use a specific credit card, keep it open so that the average age of your credit doesn't go down. Every few months, try using the card to keep it active. Closing a card can hurt your score, especially if it is your oldest tradeline.
Improving this area of your credit score is not a quick-fix since it's established over several years. Keep your revolving accounts open even if you do not have a need for them anymore, and over time you will see your score increase. Opening multiple accounts in a short span of time or closing an old account will negatively impact your credit score almost immediately.
Limit Applications for New Credit
Almost every time you apply for new credit, the lender will pull your credit report. This is what's called a hard inquiry. A hard inquiry usually will lower your score by less than 5 points, but multiple hard inquires in a short time period can have a compounding negative effect.
However, this is really only the case f applying for revolving debt. If you're shopping around interest rates for installment debts such as a mortgage loan or auto loan, the FICO® scoring method will combine these inquires into one so that your credit score does not get affected multiple times. You will typically have anywhere from 14 - 45 days to shop around while only affecting your score once.
Before applying for additional credit, see if the lender offers a prequalification. This would only be a soft inquiry, which would have no impact on your score, and it would still allow you to check your eligibility and potential terms.
The only time you should apply for additional credit is if you need it. If you are frequently applying for more credit, your credit score is going to continue to drop. Only apply for additional credit if it's necessary.
Regarding the timeline, hard inquires stay on your credit report for up to 2 years, but your FICO® score is only impacted by these hard inquires for one year or less. After 6-12 months have passed since your last hard inquiry, you should start to see your score go up a few points. Don't expect your score to significantly increase solely due to not applying for more credit.
Become an Authorized User
Becoming an authorized user is a great way to start building your credit if you are just starting out, or if you need help getting back on the right track. You are able to add an authorized user to pretty much any credit card.
Ask a parent or family member that manages their credit well if they can make you an authorized user on their account. Make sure the credit card has a clean payment history and a low utilization rate.
After you've become an authorized user, it won't take long until you start to see a positive impact on your score. Credit card issuers will usually report the entire account history to each credit bureau in 1 - 2 months. Once its been reported, your score will start to be impacted.
Dispute Inaccuracies on Your Credit Report
If something is not reporting correctly on your credit report it can adversely affect your credit score, especially if the inaccuracies involve late payments or high balances. If you have been a victim of identity theft, you will probably have fraudulent accounts on your report that are derogatory.
If you see fraudulent accounts or inaccurate information being reported, it is your responsibility to dispute it with the credit bureaus. Contact each credit reporting agency who is reporting the inaccuracies or fraudulent accounts to begin the dispute process and start an investigation.
After the investigation, the credit reporting agency will determine if your dispute is valid or not. If it's deemed valid, the agency will correct it or remove the negative information entirely. These disputes are usually cleared up within 30 days.
Hard Pull vs. Soft Pull: What's the Difference?
Both hard pulls and soft pulls are used by lenders to verify your credit score when considering lending you credit. However, there are some key differences in the way that your credit score is impacted and how they are each used. Let's dive deeper into these distinctions and figure out which type or credit check is best for your purposes, and specifically when it comes to applying for a mortgage. Check out Experian® for additional information.
What is a Hard Pull?
A hard pull, or hard inquiry, happens when a lender pulls your credit report to possibly approve you for a loan or credit card. The number of credit bureaus the lender obtains your report from will depend on the type of credit you are applying for.
Hard inquires typically impact your score a few points, but not significantly (unless you are applying for multiple credit cards in a short period of time). There is a rate-shopping window if you are shopping for the best rate and terms for a mortgage, auto loan, or private student loan. To be safe, try to keep your shopping within a two-week window as the credit bureaus will treat these as only one inquiry, which minimizes the impact on your score.
When is a Hard Pull Completed?
You can expect the lender to conduct a hard pull on your credit for the following situations:
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Buying a home
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Purchasing/Leasing a car
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Applying for a credit card
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Applying for personal loans and private student loans
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Renting/Leasing an apartment
For Local Mortgage specifically, if you submit an application but aren't ready to buy in the next 90 days, we can hold off on conducting a hard pull until you are ready to get serious and get PreApproved. We can conduct a soft pull to help you get an idea of how much home you can afford. However, we will only do this if you ask us to only complete a soft pull. We will go through our normal intake process if it's not stated. Keep in mind that a hard pull will be required to actually obtain a mortgage.
Are Hard Pulls on My Credit Report?
Yes, hard pulls will stay on your credit report for as long as 2 years, but it will not affect your credit score for that long. If you continue to manage your debt payments well and keep your utilization rate low, your score will bounce back within a couple of months. Most credit scoring models will not even include hard pulls that occurred 12 months prior in your scoring calculation.
What is a Soft Pull?
A soft pull, or soft inquiry, is a review of your credit report for purposes other than extending you credit. Lenders or companies can obtain your soft pull credit report from one, two, or all three credit bureaus. Soft pull credit checks will not suffice for every instance where a credit check needs to be completed.
Unlike hard pulls, soft pulls have no impact on your credit score. This is because the lender or company is not considering extending you credit at that time, so there is no risk being added to your financial profile.
When are Soft Pulls Completed?
You can expect to have a soft pull completed in the following situations:
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Loan prequalification
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Employment background checks
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Purchasing insurance
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Promotional offers (also called pre-screened offers)
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Renting/Leasing an apartment
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Requesting Utilities
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Account servicing
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Checking your own credit
Are Soft Pulls on My Credit Report?
Yes, soft pulls are also shown on your credit report just like hard pulls. They also remain on your report for up to 2 years. No matter how many soft pulls are on your report, your score won't be affected.
Hard Pulls
Requires your consent
May temporarily lower your score
Stays on report for 2 years
Soft Pulls
Typically no consent required
No affect on your score
Stays on report for 2 years
Why Is Your Mortgage Credit Score Different?
Many times after applying for a mortgage loan, customers will tell us that their mortgage scores are lower than what they expected. Oftentimes, the scores they see reported on services such as Credit Karma® or their credit card statement are higher than the scores on a mortgage credit report. The reason for these differences are simply based on different credit scoring models.
There are different credit scoring models used for extending different types of credit. The two main models that are used to extend credit are called FICO® and VantageScore®. While they both assess your creditworthiness, there are key differences in how they accomplish that. Let's compare both credit scoring models to learn why your mortgage score is lower than what you thought.
What is FICO®?
FICO®, developed by the Fair Isaac Corporation in 1989, is the most commonly used credit scoring model used by lenders today. FICO® scores range from 300 - 850. A higher score indicates a lower credit risk, therefore you are more likely to obtain credit. It takes a minimum history of 6 months to calculate a FICO® score.
FICO® scores are calculated based off five main factors:
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Payment History (35%)
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Credit Utilization (30%)
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Length of Credit History (15%)
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Credit Mix (10%)
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New Credit (10%)
Within the FICO® scoring system, there are many different versions that are tailored to lending in specific industries, such as mortgages, auto loans, etc.
Mortgage lenders specifically use FICO® Score 2, 4, and 5. FICO® created slightly different scoring models for each credit bureau - Experian®, TransUnion®, and Equifax®.
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FICO® Score 2, or Experian®/Fair Isaac Risk Model v2
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FICO® Score 4, or TransUnion® FICO® Risk Score 04
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FICO® Score 5, or Equifax® Beacon 5
Mortgage lenders use FICO® scoring systems to determine your qualifying mortgage credit score.
Mortgage lenders often obtain a single "tri-merge" report that contains your credit reports from all three credit bureaus and the associated FICO® scores. Mortgage lenders will use your middle credit score or, if you're applying jointly with a partner, the lower middle score of the two.
What is VantageScore®?
VantageScore® was created in 2006 by the three main credit bureaus - Experian®, TransUnion®, and Equifax® - as an alternative to FICO®. VantageScore® also ranges from 300 - 850, however there are some differences in the factors used to determine your score such as:
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Places less weight on paid-off collection accounts
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Uses "trended data" to assess how you manage your credit over time
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Only need a one month history to calculate your VantageScore
Like FICO®, there are also multiple scoring models for VantageScore®. However, VantageScore® does not offer different models tailored to specific industries. Each VantageScore® model has slight differences in the factors used to generate your credit score. For example, VantageScore® 3.0 accounts for bankruptcy, while VantageScore® 4.0 does not.
Why Does This Matter?
Services such as Credit Karma® use VantageScore® 3.0 to generate your credit score. While this is your accurate VantageScore®, it is not an accurate FICO® Score, and FICO® Scores are what are used when you apply for a mortgage.
Services such as Credit Karma® are a great way to keep track of your credit score. Just because it's not what mortgage lenders use to qualify you doesn't mean it's not an accurate representation of your credit management. But for the sake of applying for a mortgage, it's important to know your mortgage FICO® Score which you can obtain at fico.com.
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