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Generally speaking, mortgage lenders look for an established credit history in home buyers. For some lenders this is as little as one year of on-time credit payments, and no delinquencies on your credit report in the last 2 years.
Remember that each lender is different, so requirements vary. Some lenders may not want to see any delinquencies in the past 4 years, and a solid payment history for the past 2 years.
Making sure that lenders will extend the amount you need is crucial. So, what kind of credit history do lenders like to see? Most lenders offering mortgages look for:
- 100% on-time payments. No lender wants to see defaulted payments. This reduces their confidence that you will be able to pay back your mortgage on time. Make sure your credit history reflects on-time payment activity before you apply for a mortgage.
- Low debt levels. If you’re taking on too much debt and overutilizing available credit, this makes lenders nervous. Maintain low credit utilization and show that you can take on a mortgage. Otherwise, you can overextend yourself and fall into greater debt fast.
- A good credit mix. You’re currently balancing credit card debt, auto loans, and other lines of credit. This indicates that you’re more than able to budget and pay back loans in a timely manner.
Simply put, the better your credit history and score, the better borrower you appear to be.
How Much Time Does It Take to Establish a Good Credit History?
Working on your credit over time is a good idea regardless of whether you’re shopping for a house.
But those specifically in the market for a home may ask, how much time does it take to establish a good credit history?
The reality is that every lender is different. How far they look back at your history will depend on their own assessment process. The longer your good credit history, the greater your chances of success.
That being said, two years of on-time payments is typically the baseline. Most lenders will accept two years of stellar credit history when considering you for a mortgage. If you don’t have this, then see if you can wait a bit longer to build on your current history.
Things That Mortgage Lenders Look for in Your Credit Report
There are a couple of things that mortgage lenders specifically look for when you apply for a mortgage. Avoiding these can put you in a better position when you’re ready to buy a home.
Additionally, knowing that lenders might not accept you can help you look for alternative loan sources.
Lenders are looking for:
- Late payments. As we discussed above, no lender wants to see late payments. These will greatly impact your ability to secure loans with more desirable terms.
- Eviction. Evictions indicate an inability to successfully pay back rent. They stay on your public record for up to seven years, and failure to pay may impact your credit. This can prevent a lender from extending a mortgage to you.
- Foreclosure. Foreclosure is a major red flag to lenders. It shows that you were incapable of paying back a mortgage before and lost your house. This doesn’t inspire confidence.
Basically, any derogatory items that prove an inability to pay back debt will push lenders away. Work towards better credit and see if there’s any way to expunge certain records to improve your chances.
What’s the Minimum Credit Score Required for a Mortgage?
You can prepare for buying a house, but you may not be ready when the housing market is.
Sometimes, the time to strike is now. But what happens if your credit score is on the lower end? Are lenders going to seriously consider you for a home loan?
The lowest credit score that lenders of conventional loans will consider is 620. It may be harder to secure a loan with this credit score and you will likely receive a higher interest rate.
Make sure that you have a good credit history gradually raising your credit score to encourage lenders.
Also Read: Do You Need Credit to Rent an Apartment?
What Is the Best Credit Score for Getting a Mortgage?
The best credit score for securing a mortgage is 760. This will help you get the best rates and terms around the industry.
However, going above and beyond to get an even higher credit score certainly won’t hurt. This is especially applicable as a mortgage will require a hard inquiry. If you decide to pursue home renovation loans or other funding, you’ll need to maintain high credit for these as well.
Why a Credit Score Is Important
So, why is a credit score important when you’re looking for a mortgage? Here’s a summary of why you should focus heavily on credit before shopping for a home.
- Credit scores and credit history provide your lender with information about your ability to manage debt. Lower scores and late payments don’t paint you as the ideal homeowner.
- A higher credit score combined with longer credit history gives lenders more to consider. If you have a low score and very little history, a lender can’t make an educated decision on whether or not to give you money.
- Credit scores can help you secure a lower down payment (high down payments aren’t always necessary though). Lenders are willing to give you more money with a higher credit score. A lower one means less cash and more money you have to put down. You may even be able to put no money down!
- Credit scores can help you access more favorable rates. You don’t want to be paying high monthly payments and excessive interest. The higher your credit score, the better off you’ll be.
Why Do Credit Scores Matter for Home Loans?
The last point above is one that’s easily illustrated. Just a minor change in credit scores can make a difference in the rates you receive. Consider the following:
FICO Score Ranges and APRs
This change might not seem monumental. But when you add that percentage change across 15 or 30 years, it truly adds up. This is extra money you’re throwing at your mortgage because your credit wasn’t high enough to get a lower interest rate.
If you’re not in a position where your credit will be an asset, consider setting aside time to repair credit history and scores. Even though the housing market may change, you’ll be in a better position to get the mortgage you want.
This helps you save money, stay competitive, and ensure you’re ready for the next steps.
Credit history and credit scores play a crucial role in securing a mortgage. Are you looking into buying a house? If so, use the information above to learn more about why credit is so important and what to consider when shopping for a home.
Dylan Buckley is a freelance finance writer and editor with 7 years of professional experience. Specializing in personal finance, cryptocurrency investments, and Fintech, Dylan is deeply passionate about creating content that helps readers make informed, confident financial decisions. He studied finance in college and maintains a credit score over 780.