How much do FICO scores matter for loan eligibility?
The average FICO score of closed mortgage loans in June was 728, down from an average of 742 a year ago, according to the latest Origination Insight Report from mortgage software company Ellie Mae.
One thing I like to remind people is your credit score alone does not determine mortgage loan qualifications. Too often people look at data on credit scores and feel their score may be too low to seek a mortgage. Don’t let credit score information prevent you from seeking a mortgage.
Mortgages are available for people with credit scores in the 600s even with as little as 3.5% to 5% down. In fact, almost a third of closed loans in June had an average FICO score of less than 700, according to Ellie Mae. And closed FHA Loans for purchases, with an average loan-to-value of 95% (meaning buyers are putting down just 5%), had an average FICO in June of 683, according to Ellie Mae.
For homebuyers with credit scores lower than average, I’m seeing home loans being made provided the borrowers have: (1) the ability to repay based on income and their total debt levels, and (2) a positive payment history that shows they’ve managed credit responsibly.
A lower-than-average credit score does mean that you may have a higher interest rate on the loan than you would have if you had a higher credit score. All things being equal, if you have a credit score in the 600s versus the upper 700s, your interest rate will likely be higher — but financing may still be available.
A good way to start the process of getting a mortgage and a home is to check your credit report and credit score. You can get your report and score from a number of online sites, including freecreditreport.com and CreditKarma. You are entitled to a free copy of your report each year, but you may have to pay on some sites to see your actual credit score.
It is a good practice to know and monitor your credit report and your score, even if you’re not in the market for a home loan. Just remember, your credit score is just one component of the review that goes into determining your eligibility for a loan and the terms of a possible loan.