The better the credit score, the lower the interest rate it commands. That is particularly true when lenders tighten up and place stricter scrutiny on would-be borrowers. Traditionally, some less-than-perfect borrowers might slip through the cracks, but when the economy slows, it's harder to squeak by if you don't have a history of reliability and consistency of paying on time.
Don't rely on a credit score from just Experian or just Equifax. These scores often vary by 30 points, which can be the difference between a good and a fair score or a fair and a poor score. One's interest rates are based off of the FICO (Fair Isaac Corp.) score. The score is a comprehensive look at your financial track record, with payment history and amounts owed being weighted more heavily (at 65 percent of your total score) than length of history, new credit or types of credit (contributing to 38 percent of the total score).
If you're looking for a minimum credit score needed to qualify for this popular loan program, stop looking. There isn't one. That's because, even though it's an FHA loan, you'll still be working with a traditional lender and minimum scores to qualify for a home loan vary from lender to lender. In other words, there is no magic number.
Though there is no standardized minimum number, generally speaking, scores range from 340 to 850. If you have paid your bills on time, have a debt-to-credit ratio of no more than 70 percent on your credit cards and are free of delinquencies and other credit blemishes, you may fall in the 760 to 850 range (excellent to very good, depending on whom you ask). You'll qualify for the best mortgage and home equity rates. If you fall in the
good range (to fair, again depending on where you're looking) of 620 to 639 you'll still qualify for low rates, just not as low as your friend in the high 700s or 800 range. Anything below 620, it will be hard to qualify for a home loan period, especially in tough market conditions.
How much of a difference do good scores make? Even the difference between a very good versus a good score can be huge for your personal bottom line over the course of a 15- to 30-year fixed mortgage. As of late April, myfico.com reported scores in the 760 to 850 range were commanding 4.515 rates, while those from 620 to 639 hovered in the 6.104 range. That means if you have a 760 score and a 30-year fixed mortgage on a $165,000 house, you'll save nearly $200 a month on your mortgage payments than the individual with the 639 score and the same mortgage terms.
At one time a 640 was considered a very solid score. Not anymore. Now some lenders won't even look at you unless your score is in the 720 range. This should not dissuade you. Even in tough market conditions, lending standards vary drastically. Generally speaking, though, there has been a shift in lending practices and increased scrutiny of borrower's qualifications in light of the sub-prime market meltdown. Even though your good score may not command the pull it once did, it should still be enough to qualify you for a loan. And if the first lender says no or you think you could get a better rate elsewhere, shop around. Buying a home is the largest purchase most of us make, so take your time, be smart and in the meantime work on boosting your score by changing your spending and paying habits.