By Brandon Cornett
Reader question. "I currently have a FICO credit score of 670, and I want to buy a house. Is a 670 enough to get approved for a mortgage loan in 2010? Or do I need to work on improving it? Thanks."
Let me start with the short answer. Yes, a person with a 670 credit score can still get a mortgage loan in the current economy. At the same time, another borrower with a score in that range might get rejected by a lender.
Why? Because the FICO score is only one of several factors that will influence the lender's decision. It's not the be-all, end-all of mortgage approval, like some people think it is. It's only one piece of the puzzle.
So the next question you should be asking is this: How well do I measure up in the other areas that are important to lenders? A 670 credit score will be considered good by most lenders. So it will help you cause when applying for a mortgage loan. But the final approval will depend on other things as well. So let's talk about those things.
Down Payments, DTI Ratios and Cash Reserves
In addition to your credit score, lenders will look at your debt, your income, your employment situation, and the amount of money you have in the bank. Here's a breakdown of these requirements:
Credit Score -- To qualify for a conventional mortgage loan (that's not insured by the government), you will probably need a FICO score of 640 or higher. You're currently sitting on a 670 credit score, so you're in pretty good shape in this department. Borrowers with scores below 640 may have better luck using a government-backed mortgage program, such as the always-popular FHA loan. Learn more
DTI Ratio -- This is one of the most important criteria when applying for a mortgage loan. But many borrowers have never even heard of it before. Your debt-to-income (DTI) ratio is a comparison between your income and your debts. Simply stated, it measures how much of your income is going toward your debt payments -- credit cards, auto loans, etc. If you'll end up spending more than 50 percent of your income on your mortgage and other debts, you might have trouble qualifying for the loan. Learn more
Down Payment -- A credit score of 670 will help you qualify for a mortgage loan. But you'll also be required to pony up some of your own money toward the cost of the home. Currently, there are only two mortgage products that don't require a down payment -- the VA loan and the USDA / RHS loan. These programs are limited to specific borrowers (military members and rural, low-income borrowers, respectively). Everyone else will have to make a down payment of at least 3.5 percent when buying a house. Some lenders are now requiring 10 percent down for conventional loan. Learn more
Cash Reserves -- A lot of mortgage lenders these days are requiring additional cash reserves. This is extra money you need to have in the bank before closing, above and beyond what's needed for closing costs and down payment. These requirements used to be rare. But ever since the housing crisis began, they have become more common (and more strict). Some borrowers with excellent credit scores are being turned down solely because of the cash-reserve requirement.
There's another credit-score requirement you should know about, and it has to do with Fannie Mae. This company buys mortgage loans from primary lenders like Wells Fargo and Citi. So when Fannie Mae establishes
certain guidelines for mortgage approval, a lot of lenders in the U.S. will adhere to those guidelines.
In 2010, Fannie Mae raised the minimum credit-score requirement from 580 to 620. So if lenders want to sell their loans into the secondary mortgage market (through Fannie Mae), they'll require borrowers to have a score of 620 or higher. Since you have a FICO 670 credit score, you are well above this minimum cutoff. Good news for you.
Benefits of Boosting Your 670 Credit Score
Mortgage approval is one side of this subject. Granted, it's the most important side from a borrower's perspective. But there are other benefits to boosting your credit score as well. It will also help you secure a lower interest rate, which could save you thousands of dollars over the life of the loan.
Here's a scenario that illustrates my point:
- Roger purchases a home using a 30-year fixed-rate mortgage.
- The loan amount is $250,000.
- Roger has an excellent credit score of 790.
- The lender offers him the best mortgage rate they have -- 5.4 percent.
- Roger's monthly mortgage payment will be approximately $1,400.
- Over the 30-year term of the loan, he would pay $255,377 in total interest.
Mortgage scenario #2
- Jane also buys a house with a 30-year fixed mortgage.
- The loan amount is the same as in the first scenario -- $250,000.
- Jane has a FICO credit score of 670, just like you.
- This score prompts the lender to assign a higher interest rate of 6.9 percent.
- Jane will pay about $1,646 per month on her mortgage loan.
- Over the life of the loan, she would pay $342,740 in total interest charges.
Jane is paying $246 more per month than Roger. Most of their qualifications are the same, but 670 credit score has resulted in a higher rate of interest for Jane. Roger's higher score helped him secure a better rate. Over the life of the loan, Jane will end up paying nearly $90,000 more than Roger in total interest charges.
By the way, I didn't just pull these numbers out of left field. It's a realistic scenario, actually. I used current financing trends at the time this article was published. I then used a mortgage calculator to calculate the monthly payments, as well as the amount of interest paid over time. These two scenarios clearly show the benefits of boosting your FICO score.
It really doesn't take that much to improve a credit score. With a bit of discipline, you could probably lift your 670 FICO score into the 700 range within a few months. This would make the approval process much easier, and it would help you qualify for a lower rate on your loan. You've seen how much money this might save you over time. Here's the best way to go about it.
Just keep in mind that other factors will be considered, in addition to your FICO score. The amount of debt you current have, relative to your income, is also a big factor. So you should be looking into your debt-to-income ratio, as well as your credit picture.
I hope this answers your question about 670 credit score, and I wish you well in the home buying process. If you would like to learn more about this topic (or anything else that relates to buying a house), try using the search tool at the top of this page. It gives you instant access to a research library of more than 800 articles.