Everything nowadays is distilled down into numbers. From how you did in school to how you rank at your job, it all has a number assigned to it. The same is very true regarding how you manage your credit. The three major credit bureaus, Equifax, Trans Union and Experian, collect your borrowing and payback history from all your lenders. This information is then distilled into a credit score.
How a Credit Score is Determined
Credit scores are determined by a formula developed by the Fair Isaac Corporation. There are many factors involved in determining your credit score, with the main ingredients being the amount of credit, payment history and types of credit. Credit scores can range from 350 to 900, with 350 being the worse possible and 900 being the best. As you can imagine, mortgage companies look very closely at your credit score when determining your interest rate or to even offer you a mortgage at all. The lower your score, the lower your chance of getting a mortgage and the higher your rate will be. The opposite is also true - the higher your score, the lower your rate and the greater the chance of the mortgage company granting you a mortgage.
What the Numbers Really Mean
The basic rule is that borrowers with scores in the top tier between 760 and 900 are offered the best rates and most choice for mortgages. If your score falls in between 620 and 760, mortgage companies will offer you their standard products. Don't expect anything special at this level.
If your credit score is below 620, you fall into the subprime category. Several years ago it was easy to get a subprime mortgage; although it wouldn't be on great terms or at a very favorable interest rate, they were readily available. Today, after the subprime banking crisis, subprime mortgages are very difficult to locate, but a few providers still exist.
For those of you with very low credit scores, be aware that a FICO score of 500 is generally the lowest any mortgage company will consider with anything but a huge down payment. There are the so-called "hard money" lenders who will write a mortgage regardless of your credit score, but be prepared to put at least 50% cash down on your purchase.
The Bottom Line
The Fair Isaac Corporation's consumer website, MyFico.Com has a chart that is updated daily and shows exactly how your credit score will affect your mortgage rate. Essentially, a high FICO score can save you $1,000s over the term of your mortgage. Wise consumers do all they can to keep their credit score competitive. (To learn more, read Getting A Mortgage: How The Process Has Changed.)