Most people will buy a home at some point in their lives, and the vast majority of those who do will need a mortgage. While several factors play a role in whether you can get a mortgage, your credit score is one of the main factors. If you have a low credit score, you still may be able to get a home loan, but it will be more difficult and may cost more in the long run.

Risk

So why is your credit score so important when you are trying to get a mortgage? It’s all about risk. Your credit score is like your financial report card, and a higher score is an indicator of reliability. The lower your score, the more likely it is you will miss payments or default on your loan, which makes it more of a risk for the lender.

What score do you need?

Different lenders require different credit scores, so minimum credit scores for a home loan will vary from one lender to the next, even for government issued loans such as a VA home loan. Most conventional lenders require a minimum FICO score of at least 620, but some may go as high as 640. If you qualify for an FHA loan, you need a score of 580 to be eligible with a low down payment. If you can make a down payment of at least 10 percent, then you might be able to get an FHA loan if your credit score is lower than 580.

How credit scores affect your mortgage

Even if you can get a mortgage with a low credit score, it’s likely to be more expensive. The low rates that lenders advertise are only available to the most-qualified borrowers with the best credit scores, usually at least 720 or better. Borrowers with lower scores will pay higher interest rates. For example, say you can get a 4 percent interest rate on a 30-year mortgage if your credit score is 720. If your score is only 680, you might pay 4.5 percent, which can cost you a significant amount of money. A $200,000 mortgage for 30 years at 4 percent would have a monthly principal and interest payment of approximately $955. At 4.5 percent, the payment for the same loan goes up to $1,013 a month. Over the full mortgage term, that’s almost $21,000 more.

Before applying for a mortgage, work on your qualifications for a home loan and check your credit report. If it is low, don’t feel discouraged. Consider delaying your home purchase and trying to improve your score. When the time comes to find your dream home, you’ll feel confident and secure in your ability to get a mortgage.

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