We hear the term “Credit Score” quite often these days because of its influence on so many aspects of our lives – from basic purchases we make with a credit card and our insurance rates, to major purchases such as vehicles and homes.
Your credit score is a critical piece of your financial ecosystem. It can have far reaching implications, and touches many aspects of your life. If you have a spouse, their credit score is also a factor and should be considered, especially when it comes to major purchases.
In general, the higher (and better) a Credit Score is, the less you will pay for items that you purchase with credit (a loan).
I will keep this relatively short and sweet and not dive to deep into the Credit Score topic, as there are many great articles and guides available online. Instead I'll focus on how credit scores affect home purchasing power and the cost of homeownership – or put more simply - your ability to purchase that home of your dreams! (or even buy a home at all).
Ok, So What Exactly is a Credit Score?
“FICO” is the most commonly used credit scoring model – used by 90% of lenders – and has been in use since 1989. FICO is actually a data analytics company (learn more about them here).
There are many versions to the FICO score model, but currently the most commonly used versions are FICO Score 8 and FICO Score 9. Which FICO version is used depends on the Credit Bureau, as well as the type of “credit” being pursued by a consumer (i.e. credit card, vehicle purchase, home purchase, etc).
The vast majority of mortgage lenders use the “classic” FICO Score of 2, 4, or 5 when analyzing applications. When mortgage lenders request credit reports from the Credit Bureaus, they receive the following.
Experian: FICO Score 2
TransUnion: FICO Score 4
Equifax: FICO Score 5
Most mortgage lenders will pull all three FICO Scores (2, 4, and 5) from Experian, TransUnion, and Equifax. This is known as a “tri-merge” according to Darrin Q. English, a senior community development loan officer at Quontic Bank. Ultimately, the lender will only use one which will be the median score of the three.
If you are applying for a home loan with a spouse or partner, then their FICO Scores (2, 4, 5) will also be pulled. All six reports will then be analyzed. The median from each person will be identified, and then the lower of the two median scores will be used. (source: cnbc.com)
Understanding a Credit Score – A Breakdown
So what drives a FICO score up and down?
According to Investopedia, FICO Score 5, used by Equifax, breaks out as follows and will be similar to FICO Score 2 (Experian) and Score 4 (TransUnion).
Payment history (35%)
Accounts under your name (30%)
Credit history length (15%)
New credit (10%)
Credit mix (10%)
However, in addition to above, be aware that Fico 5 (and 2 and 4) also considers other key pieces of financial makeup and history such as employment, medical accounts, and residential history. With a major purchase such as a home, lenders must be confident that a home loan applicant is willing and able to repay the loan. Employment history for example shows whether someone has job and earning stability.

So What’s Considered a “Good” FICO Credit Score?
Generally speaking, credit scores range between 300 and 850. However, to be considered for a conventional mortgage loan, your FICO score should be at least 620.
With a FICO score of 620, you are not guaranteed to qualify for a mortgage (it can depend on the lender and type of mortgage loan, as well as other extenuating circumstances), and if you do ultimately qualify, your interest rate will be higher in comparison to those with FICO scores of 650 and above, and much higher than those with FICO’s of 740 and above.
To qualify for the best mortgage options, and lowest interest rates, you will want a FICO score of at least 740.
Another factor to consider if pursuing a conventional mortgage loan, is the PMI (Private Mortgage Insurance) rate you will pay if using less than a 20% down payment on a home purchase. The lower your FICO score, the higher your PMI rate will likely be.
See the Difference
Specialized mortgage payment calculators allow you to visualize the impact a credit score can have on monthly mortgage payments, as well as the interest paid over the life of the loan.
For the two below calculators, enter your home loan details and credit score range (bad, poor, fair, good, excellent). If you don't know your credit score, learn how to get a free credit report and score here.
TransUnion's Mortgage Payment Calculator allows you to input more detailed home loan attributes such as property taxes, homeowners insurance, and HOA dues.

FICO Score Under 620? There’s Still Hope!
If you’re FICO Credit Score is less than 620, there are still options for you to purchase a home with a mortgage loan.
FHA Loans: A very popular option, especially for first time home buyers. You’ll need at least the following to qualify according to Bankrate.com.
FICO score of at least 500 to 579, and be able to put a 10 percent down payment toward the loan / home cost.
OR a FICO score of 580 or higher with a 3.5 percent down payment.
For a FHA 203K Loan (A home renovation loan that provides funds to purchase the home, as well as additional funds to renovate the home). You’ll need a score of 620 or better.
You’ll need verifiable employment history for the last two years.
Be able to verify your income through pay stubs, federal tax returns, and bank statements.
The loan FHA loan can be used only to finance a primary residence (sorry, investment / rental properties not allowed).
The monthly mortgage payment can be no more than 31 percent of your gross monthly income. Your mortgage payment PLUS all monthly debt payments can be no more than 43 percent of gross monthly income.
VA Loans: If you’re a Veteran or active military, this may be a great option for you to purchase a home.
How to qualify according to the Veterans Administration (VA):
90 continuous days of active duty
90 consecutive days during wartime
181 days during peacetime
More than six years in the National Guard or Reserve
VA guidelines don’t require a minimum credit score, BUT many lenders set their minimum at 620.
For more information on the criteria to qualify for VA Loan, check out this article from LendingTree.com.
Another great source on VA home loans: VA Home Buyers guide provided by the VA.
USDA Loans: If living in a rural area sounds good to you, then a USDA loan may be a viable option. For more information and to determine if a USDA loan may be a good fit for you, check out this article from NerdWallet.com.
There’s no minimum Credit Score set for a USDA loan, but a FICO Score of 640 or higher automatically qualifies you for a loan and streamlines the processing. For those with Credit Scores under 640, they may still be eligible, but it requires a manual and more stringent underwriting effort.
Owner-occupied primary residences only (no investment / rentals).
U.S. citizenship (or permanent residency)
A monthly house payment (principal, interest, insurance, and taxes) that’s 29% or less of your monthly income. Other monthly debt payments can’t exceed 41% of your income.
Sustained income for a minimum of 24 months
An “acceptable” credit history – such as no accounts converted to collections within the last 12 months, etc.
In Summary, here’s the breakdown of possible mortgage loan options depending upon your situation.
Conventional Loan: 620 or higher. However 650 and above you will have better rates. 740 and above you will have the best rates.
FHA Loan: 580 or higher (scores of 500-579 are possible but unlikely). FHA 203K Loan: 620 or higher. (A home purchase, plus renovation loan)
VA Loan: 620 or higher (some lenders will allow 580 or higher)
USDA Loan: 640 or higher
So You Know About FICO Credit Scores and Mortgage Loan Options, Now What?
To start, you should you know your FICO credit score, and monitor it on a regular basis (at least yearly, preferably more often).
Per Federal Law, you are entitled to a FREE credit report from each of the three credit bureaus every 12 months. You can get your free reports from here: AnnualCreditReport.com.
You can also set up credit score monitoring to be proactive. You may already have such a monitoring company working for you if your personal information was tampered with or stolen from a company or organization (by law they’re required to offer such for a certain amount of time).
If you don’t already have a credit monitoring service working for you, or want to bolster your current free service, the following are some options to consider (there are many others available). These services below can also provide your current FICO Credit Score.
Costs vary from “Free” to $40 per month. Most of these companies also monitor for identify theft, especially the paid plans. Identify theft can lead to damaged credit, so it’s definitely something to consider.
CreditWise – Free
Experian – Free to $35/month
MyFico – Free to $40/month
IdentityForce (from TransUnion) – From $18 to $36/month
PrivacyGuard – $20 to $25/month
Credit monitoring may not be needed indefinitely (or at all) depending on your situation (and your spouse's or partner's if applicable), but it could be a worthwhile expense if preparing to purchase home in the near future and you want to improve your Credit Score, or ensure it remains in good standing.
Ultimately, the cost of a monitoring service may pay for itself several times over through a better mortgage interest rate, or that you’re able to actually qualify for a mortgage and home purchase. However, you are the best judge of your personal financial position and needs. Your financial advisor, mortgage broker, or real estate agent can also help you determine the best option(s) for you and your unique situation.
How to Improve Your Credit Score
Improving your FICO credit score in preparation for a home purchase, is not done overnight. It can take time, so plan ahead.

Step 1: Learn the basics of credit scoring, and your credit score. This article from the Consumer Financial Protection Bureau (I know, sounds so serious!) is a great place to start. See above for sources to find your credit score.
Step 2: Understand debt and when to use it and how to best manage and monitor to ensure debt does not spiral out of control beyond your means. This article from Skills You Need is a great tutorial for those that want to learn more about debt and the different types, or a refresher for those that know their debt well.
Step 3: Manage debt. There are many schools of thought on how to best reduce and manage debt, but I like these seven steps from TIAA.org as they're simple and straightforward. With a quick online search, you can find other ideas and approaches. There are also many online tools and apps that can assist with managing debt and budgeting. This guide from mybanktracker.com shares ten different online tools / apps. If you prefer a simpler method, try this reducing debt worksheet that you can print out and use from ConsumerFinance.gov
Step 4: Improve your credit score (sooner rather than later). The preceding three steps and tactics will help you manage, improve, and sustain your credit score. However if you have a FICO credit score which is preventing your from qualifying for a mortgage loan (or the best rate), there are steps you can take that may improve your score more quickly. This article on themortgagereports.com has ten steps you can take. In particular, the following three actions may help you more quickly improve your credit score.
Dispute errors with your creditors if there’s a legitimate error your find on your credit report. This can still take time, and ultimately many not gain you the credit score bump, but it’s still a worthy endeavor as your credit report should be accurate and reflect actual payment activity. The speed and success of a dispute will vary depending on the creditor, and of course their side of the story. For more details and help, you can learn more at ConsumerAdvocates.org.
Pay down as much of your debt as possible. Your Loan Officer or Mortgage Broker can steer you toward what debt would be the most beneficial to pay down or off.
Request a rapid rescore if you’ve made recent and noteworthy improvements to your debt situation and/or credit report (error correction). Per Craig Berry, of The Mortgage Reports, “The process can lift your score by 100 points or more within days when erroneous or negative information is cleared from your credit profile.”
Other Reasons You Want a Good Credit Score
There are numerous reasons to strive for a credit score in the “good” to “excellent” ranges. This article from the balance shares some insight as to why that is – 9 Benefits of Having a Good Credit Score – such as:
Reduces your overall costs (car loans, credit card rates, etc)
Helps qualify for and minimize housing costs (renting and purchasing)
Better insurance rates
Can help you get a job (yep! Read more here from Experian)
When you add up all the benefits of having a “good”, “very good” or “excellent” FICO credit score, it’s substantial, especially in the long run. You can potentially save thousands of dollars in interest payments, qualify for a better / higher paying job, have lower insurance rates, and the list goes on.
The impact to you / your family’s quality of life can be quite significant. Yes, a better score will help you qualify for a home mortgage, or a better rate, or larger home, but it’s bigger than that. It’s a foundational piece of your personal finance ecosystem, and something that should be actively managed.
What Home Financing Options Are Available For YOU?
If you’re wondering what your mortgage loan options are based on your current situation (and perhaps your spouse’s or partner’s as well), the best path is to speak with a mortgage professional.
This can be through your local bank or credit union, or a mortgage broker.
If you’re in the Puget Sound area, I work with some great mortgage brokers, as well as Loan Officers that I can put you in touch with (contact me here).
I always recommend talking to at least two or three lenders so you can compare and identify the best loan option for you and your situation.
Now Go Crush Some Debt!
Credit scores can have a significant and lasting impact on our lives – from getting a job and everyday purchases, to that vehicle we need to get around, or that home we need for our growing family.
Knowing and monitoring our credit score is easier than ever, and something we should all consider to help evaluate what actions (if any) are needed to best manage debt and achieve the best credit score possible.
Optimizing debt will result in a better FICO credit score, which in turn can literally make life less expensive, create opportunities, and improve lifestyles!
Thanks for reading!
- Joe
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