A credit score is used to assess a borrower's likelihood to repay a debt. The Fair Isaac Corp.'s scoring system is the one used most widely by the major credit bureaus: Equifax, Experian, and TransUnion. Each credit bureau markets its own brand of scoring. Beacon is the name of the trademarked scoring system used by Equifax. Most basic credit scores are termed FICO scores. If you are trying to buy a house, the mortgage lender will generally pull credit reports and scores from all three bureaus to determine your creditworthiness.
When you apply for a mortgage, the lender requests permission to obtain copies of your credit report from each bureau. Because creditors might not report to every bureau, an account might appear on one report but not the others. According to MSN Money, if all three scores are different, lenders use the middle score. If two of your scores are the same, the lender will use that number, regardless of whether the third score is higher or lower. If you are applying with a spouse or other co-borrower, lenders will use the same formula to calculate each individual's score; they then use the lower score. FICO scores, including your Beacon score, range from 350 to 850. According to Equifax, at the end of 2012 the average national credit score was 696.
Conventional Loan Requirements
Conventional loan credit requirements vary significantly because each lender sets its own credit requirements for mortgage approval. It's possible to obtain a mortgage with a credit score as low as 580, but lenders would require a down payment of 20 percent or more. According to Bank of America, most lenders require a credit score of at least 620. Lenders might agree to a lower down payment if you'll pay for private mortgage insurance. Factors on your credit report, such as past delinquencies and charge-offs, can affect your ability to qualify for certain loans. Borrowers who need to finance more than the normal mortgage mamaximum of $417,000 will need a credit score of 700 or more, along with a larger down payment.
A higher Beacon score means a lower interest rate. With a lower score, a lender might approve your loan application, but at a higher interest rate. A score of 740 or more generally qualifies for the best mortgage rates from most lenders. A score of 720 will earn a good interest rate, according to myFICO. Interest rates can vary significantly from one credit tier to the next. The interest rate difference between two scores is around one-third of a percentage point. That might not seem like a big difference, but it can cost you thousands over the life of the loan.
The Federal Housing Administration secures loans, approved by FHA lenders, that feature low down payments and flexible credit requirements. Although the FHA credit criteria are more forgiving than those for conventional loans, applicants still need good credit histories. Those with solid track records of timely payments are likely to qualify. The FHA sets the loan requirements that lenders must follow. According to FHA.com, applicants should strive for a score of at least 580 to obtain full financing with 3.5 percent down. Borrowers can still qualify with a Beacon score as low as 500, but the down payment will increase to 10 percent of the sale price.
- Bank of America: Changes to the Mortgage Process
- MSN Money: Which FICO Scores Do Lenders Use?
- Bankrate.com: Qualifying for a Conventional Mortgage
- FHA.com: Minimum Credit Scores for FHA Loans
- Equifax: Best and Worst Credit Scores by State
- MyFICO: 3 FICO Scores? Why There's More Than One and Which One Counts.