Getting a Mortgage? Credit Score Matters Today More Than You Think
Mortgage rates might be exceptionally low these days, but borrowers will need impeccable credit to take advantage of them. Interest rates on home mortgage loans hit new lows a whopping 16 times in 2020. Meanwhile, the median credit score among mortgage borrowers rose to a record 786 during the pandemic, according to the New York Federal Reserve, which closely tracks consumer credit data.
Catherine Falls Commercial/Getty Images
While mortgage rates are off their record lows this year, it’s a seller’s market in places like Austin, Sacramento, Boise, and even parts of Montana—and inventory is struggling to keep up. “The housing market is entering the busy spring buying season with strong demand," says Joel Kan, President of Economic and Industry Forecasting for the Mortgage Bankers Association.
Homebuyers need a minimum Fair Isaac Corporation (FICO) score of 620 for most types of mortgages, but borrowers with scores above 740 are in the best position to take advantage of low interest rates. Borrowers with credit scores above 760—many of them refinancing to take advantage of lower interest rates—drove the largest volume of mortgage originations in 2020, the New York Fed’s data shows.
What's a credit score, anyway?
FICO scores are the backbone of consumer lending in the U.S. They measure the risk of lending to borrowers and dictate loan terms. The average U.S. credit score climbed to a record 710 in 2020, according to Experian, one of three major credit reporting bureaus in the U.S. And in the most competitive housing markets, such as San Francisco, buyers have some of the highest credit scores out there.
In the northeastern U.S., 720 is the average VantageScore, a measure of borrower responsibility similar to the FICO score. In the pricey Bay Area, homebuyer Vantage Scores range from 758 in San Jose to 782 in San Francisco, according to CreditKarma, a company that offers credit data and monitoring services.
What do I need to do to increase my score?
If you’re thinking about buying a house, you should already have a handle on paying your bills on time. You shouldn’t have any delinquent balances. If you do, this is the time to deal with them, then set your bills on AutoPay, since late and delinquent accounts are the biggest drags on your credit score.
Pay down debt and keep your credit card spending below 30% of your credit limit. This is a measure called credit utilization and it's the second-most important factor in your credit score.
Keep any unused credit cards open, because the available credit works in your favor. Use them occasionally to keep them from being deactivated by issuers and pay off the balance in full. Resist the urge to buy a new car before you close on your dream home; the same goes for opening new lines of credit.
Don't assume a low score is your fault.
If you’re doing all the right things and still struggling to increase your credit score, check your credit report for common errors, such as accounts being reported more than once, delinquencies that linger past their seven-year expiration date, or the inclusion of a former spouse's debts.
Credit reporting errors were the top source of complaints to the Consumer Financial Protection Bureau in 2019. The bureau received more than 150,000 consumer complaints related to credit report errors in 2019—a 23% increase from the year before.
To correct errors on your credit report, contact the credit reporting bureau and the organization that provided the incorrect information. Bureaus are responsible for correcting credit reporting errors, and all three—Equifax, Experian, and TransUnion—now allow consumers to file disputes online. Through April 2022, they’re also offering consumers one free credit report each week.
Correcting credit reporting errors might take some effort, but as a potential home buyer, it could pay off big in the housing market.
