Home Buying and Credit Repair – How to Improve Your FICO Score

When planning to buy a home, one of the first questions to ask is: What is my mortgage FICO score? Here’s how your FICO score affects your ability to buy a home, and how to improve it.

What is a “Mortgage” FICO Score?

FICO scores vary, by credit agency and inquiry type. The FICO score that you can order online will be different from what a mortgage lender obtains. I have also heard that the FICO an auto lender orders is also different. The three credit agencies – Experian, Equifax, and TransUnion – have yet to explain how these scores vary, and exactly how they are calculated.

You can obtain your mortgage FICO from a loan officer. Many lenders will do this for free.

Lenders receive one score from each of the three credit agencies, and then use your middle FICO score to determine your rates. For example, if your scores are:
TransUnion – 720
Experian – 765
Equifax – 759
Your lender will choose the middle score, or 759.

If you are buying a property with someone else, the lender will check both FICO scores. Then, they will compare the middle scores, and choose the lower of the two middle scores.

What is a “Good” FICO Score?

In many cases, lenders offer rates based on your FICO score, in intervals of 20. For example, there is a rate for FICO scores between 700-719, a lower rate for FICO scores between 720-739, and an even lower rate for FICO scores between 740-759. Often, the top tier is 760+. Whether your FICO is 760 or 820, you usually receive the same low rate.

While there are programs out there that allow FICO scores as low as 500, they tend to be expensive. Most programs require a minimum FICO score of 620. The better your credit score, the lower your interest rate.

Why FICO Matters – Conventional Mortgages

For conventional loans, your FICO score will affect both mortgage interest rates and mortgage insurance rates . Many conventional loan programs require a minimum score of 620.

Mortgage Interest Rates

Interest rates are can be much higher with lower FICO scores. I have noticed a big difference between the rate for a 680-699 FICO, and a 700-719 FICO.

Here’s an example that I created back when interest rates were lower. The rates are higher now, so the difference is also higher. This only shows the difference in mortgage interest, and doesn’t include the difference in mortgage insurance (more on that in the next paragraph):

Mortgage Insurance Rates

Mortgage insurance rates are also directly tied to your FICO score. The minimum FICO score for a conventional loan with mortgage insurance is often 620. If your FICO score is 760 or better, the rate for a 3% down conventional mortgage is 0.55%. If your FICO were to drop between 620 and 639, the insurance rate increases to 2.25%. Insurance rates also go down with a larger down payment. There is no mortgage insurance if the down payment is at least 20%.

Example of Mortgage Insurance for a $400,000 loan (3% down payment):
760+ FICO: $400,000 x .55% = $2,200 divided by 12 = $183.33 monthly mortgage insurance payment
639 FICO: $400,000 x 2.25% = $9,000 divided by 12 = $750.00 monthly mortgage insurance payment

You can see in this example that if your FICO is 639 or lower, you need to pay over $566 more every month in mortgage insurance than if your FICO were at or above 760.

Your FICO and FHA Loans

FHA loans, or loans insured by the Federal Housing Administration, are more forgiving than conventional loans. The minimum FICO score to qualify for an FHA loan is usually 580. (Rules change often, so please check with your lender.)

Your FICO score has a minimal effect on the FHA mortgage interest rate. Mortgage insurance rates are the same, regardless of your FICO score. Read my article about FHA loans for more details.

Your FICO and VA loans

VA loans, which are loans insured by the Veterans’ Administration, are also more forgiving than conventional loans. The minimum FICO score to qualify for some VA loan programs is only 500. These low FICO programs, however can have a very high interest rate. Once your FICO reaches 620, your credit score has a minimal effect on your interest rate.

There is no monthly mortgage insurance for VA loans. The one-time VA Funding Fee is not affected by your FICO. Read my article about VA loans for more details.

How to Improve Your FICO Score – Credit Repair

There are many credit repair companies out there. They promise a significant increase in your FICO, and often charge high fees. Is it worth it?

always recommend skipping the credit repair company, and instead connect with a local lender who can provide credit repair service for free. They only get paid if you close a loan with them, so they have a strong incentive to improve your FICO score and get you qualified for a loan.

Depending on your credit record, it can take anywhere between a few weeks to several months to improve your score. It’s best to get started early on credit repair, if you wish to buy a home in the future.

The Bottom Line

Even if you qualify for a VA or FHA loan, your FICO matters. If will not only affect your ability to buy a home. Your FICO score can be scrutinized for many types of applications, including car insurance, property rentals, and even employment.

Do what you can to monitor and improve your score. Usually, the lowest rates require a 760 FICO score. Instead of hiring a credit repair company, that may be expensive and unreliable, choose a good local lender who can provide credit repair services for free.

UPDATE: Effective 2020, there is a new, no-cost online home buyer workshop. This new tutorial is a comprehensive homeownership education course. CreditSmart® Homebuyer U offers six modules to promote education, homebuyer preparedness, and financial management.

Good luck, and as always, contact me with any questions.