Dan Green

Dan Green

Since 2003, Dan Green has been a leading mortgage lender and respected industry authority. His unwavering commitment to first-time home buyers and home buyer education has established him as a trusted voice among his colleagues, his peers, and the media. Dan founded Homebuyer.com to expand the American Dream of Homeownership to all who want it. .

New Orleans Home - Credit Score

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What is a Credit Score?

A credit score represents the probability that a home buyer will make on-time payments to their mortgage lender for the next 90 days.

A Longer Definition: Credit Score

In mortgage lending, credit scores are a probability statistic and objective measure of a home buyer’s risk to a lender. Higher credit scores correlate to lower lending risk.

The most common mortgage credit scoring model is the FICO score, which was named for the Fair Isaac Corporation. FICO developed its credit model in 1956 and continues to fine-tune its predictive algorithm today.

FICO credit scores are based on five weighted categories that combine to generate a rating between 300 and 850, with 850 being the highest credit score possible.


Minimum FICO Scores for Popular First-Time Home Buyer Mortgages

Mortgage Type Minimum FICO
FHA mortgage 500 minimum FICO
VA mortgage 580 minimum FICO
Conventional mortgage 620 minimum FICO
USDA mortgage 620 minimum FICO

A home buyer can get approved for a mortgage with a 500 FICO score or higher.


FICO Scores and Credit Ratings

FICO Score Credit Rating
740 FICO or higher Excellent credit
660-739 FICO Above-average credit
620-659 FICO Average credit
580-619 FICO Below-average credit
579 FICO or lower Poor credit

A home buyer with higher credit scores is more likely to make a mortgage payment in the next 90 days, which reduces the risk of mortgage default.


The 5 Components of a Credit Score

Credit Score Component Percentage of Total Score
Payment history 35% of the credit score
Amounts owed / maxed-out percentage 30% of the credit score
Experience managing credit (in years) 15% of the credit score
Types of credit extended 10% of the credit score
Recent new credit extensions 10% of the credit score

A mortgage credit score predicts a home buyer’s next 90 days, relying on models that prove recent events affect future performance.

For example, a home buyer who missed a payment this month would likely miss a payment again next month, damaging their credit score. However, a missed payment two years ago is proved to have no bearing on the next 90 days and wouldn’t affect their score by even one point.

The credit score algorithm forgives, and credit scores can be rebuilt.

Credit Score: A Real World Example

First-Time Home Buyer Stories: Credit Score

Imagine a first-time home buyer who gets pre-approved for a mortgage six months before planning to buy a home.

As part of the mortgage pre-approval, they learn their credit score is 610, which is high enough to get approved for an FHA mortgage, but not high enough for the potentially lower mortgage rates that a conventional mortgage can offer. So, the buyer begins taking steps to make their credit score higher.

First, they keep their credit cards current and set digital reminders to pay every bill on time. Then, they use free cash to pay down smaller credit cards and shift around some balances. Lastly, they stop applying for new cards and then sign up for the StellarFi credit building service.

Within 6 months, the home buyer’s credit score climbs sharply, and the buyer qualifies for FHA, conventional, VA, and USDA mortgages, with new affordability options and lower monthly payments.

Common Questions About Credit Score

How is a credit score calculated?

Credit scores are calculated using the information in your credit report, including your payment history to your creditors, overall credit utilization on your accounts, length of credit history in years, ages of your credit accounts, and the types of credit you use.

Can I get a mortgage with a low credit score?

Yes, home buyers get mortgages with low credit scores all the time. However, with a low credit score, interest rates might be slightly less favorable.

How can I improve my credit score quickly?

To improve your credit score quickly, check your credit report for errors, bring your delinquent bills current, and avoid opening new credit lines. Reputable credit-building services like StellarFi can help, too.

What factors will negatively impact my credit score?

Certain credit events will lower your credit score quickly, such as missing payments to creditors, spending near your credit limits, and applying for multiple new credit lines in a short period.

Is it possible for errors to appear on my credit report?

Yes, errors can appear on your credit report. These might include incorrect personal information, accounts that don’t belong to you, or inaccurate account statuses. Regularly reviewing your credit report will help you identify and dispute any errors.

What Makes Up Your Credit Score

Citations

This article, "What is a Credit Score?" draws on the author's professional mortgage experiences and references information found at these authoritative websites:

       A credit score represents the probability that a home buyer will make on-time payments to their mortgage lender for the next 90 days.

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