What is a good credit score? This is a crucial question for anyone looking to buy a home, as credit scores play a key role in mortgage approvals and interest rates. 

Real estate agents who understand credit score fundamentals can better guide their clients through the homebuying journey, helping them secure favorable loan terms.

A good credit score can mean lower interest rates, higher chances of getting a home loan, and better financial stability. 

This guide will explore credit score ranges, how they affect mortgage approvals, and practical steps for improving credit scores.

Understanding Credit Score Ranges

1. What Is a Credit Score?

A credit score is a numerical representation of a person’s creditworthiness, typically ranging from 300 to 850. Lenders use this score to evaluate the risk of lending money to a borrower.

2. Credit Score Ranges and What They Mean

Credit scores are divided into different categories, with higher scores indicating lower credit risk:

• Excellent (800-850): Borrowers in this range receive the best mortgage rates and easiest loan approvals.
• Very Good (740-799): Still considered highly creditworthy, offering competitive mortgage rates.
• Good (670-739): A good score qualifies borrowers for most conventional loans with reasonable rates.
• Fair (580-669): Borrowers may face higher interest rates and stricter lending requirements.
• Poor (300-579): A low score significantly reduces mortgage eligibility and leads to higher costs.

How Credit Scores Impact Mortgage Approvals

A credit score is one of the most important factors lenders consider when approving mortgage applications. It not only determines whether a borrower qualifies for a home loan but also directly impacts interest rates, loan terms, and required down payments. Lenders use credit scores to assess the risk of lending money—higher scores indicate responsible financial behavior, while lower scores signal a greater risk.

For real estate agents working with homebuyers, understanding the connection between credit scores and mortgage approvals can help guide clients in preparing for homeownership. Below, we break down the specific ways credit scores affect mortgage applications.

1. Minimum Credit Score Requirements for Home Loans

Different types of home loans have varying minimum credit score requirements. While some government-backed loans have more lenient criteria, conventional loans typically require higher credit scores. Here’s a breakdown of common mortgage options and their credit score thresholds:

• Conventional Loans: Borrowers generally need a minimum credit score of 620-640 to qualify. These loans, offered by private lenders and not backed by the government, tend to have stricter credit requirements but offer competitive rates for those with good scores.

• FHA Loans: Aimed at first-time homebuyers or those with lower credit scores, FHA loans require a minimum score of 580 to qualify for the standard 3.5% down payment. However, borrowers with scores between 500-579 may still qualify but must make a 10% down payment to compensate for the increased risk.

• VA Loans: Offered to eligible military service members, veterans, and their spouses, VA loans do not have a set minimum credit score requirement. However, most lenders prefer borrowers with scores of 620 or higher to approve the loan with favorable terms.

• USDA Loans: Designed for low-to-moderate-income borrowers in rural areas, USDA loans typically require a 640+ credit score to qualify for automated underwriting approval. Borrowers with lower scores may still be eligible but will require manual underwriting and additional documentation.

For real estate agents, helping clients understand these requirements can prevent surprises during the mortgage application process and allow homebuyers to take the necessary steps to improve their credit scores before applying.

2. The Effect of Credit Scores on Mortgage Interest Rates

A borrower’s credit score doesn’t just determine whether they qualify for a mortgage—it also plays a major role in how much they will pay over the life of the loan. Mortgage lenders assign interest rates based on perceived borrower risk, and higher credit scores typically lead to lower interest rates.

For example, here’s how credit scores can impact mortgage interest rates:

• A borrower with an 800+ credit score might qualify for a 5.5% interest rate.
• A borrower with a 650 credit score might only qualify for a 7.5% interest rate.

While the difference between a 5.5% and 7.5% rate may seem small, it can significantly impact the total cost of a mortgage. Over the course of a 30-year, $300,000 loan, this difference could translate to tens of thousands of dollars in additional interest payments.

Real estate agents should educate clients on the importance of improving their credit scores before applying for a mortgage. Even a slight credit score boost could result in thousands of dollars in savings over time.

3. How Credit Scores Affect Loan Amounts and Down Payments

Borrowers with higher credit scores are often approved for larger loan amounts and lower down payments. Here’s why:

• Higher Loan Amounts: A good credit score reassures lenders that the borrower can responsibly handle debt, making them more likely to approve higher loan limits. On the other hand, borrowers with low scores may have restricted loan amounts or require additional financial documentation to qualify.

• Lower Down Payments: While some loan programs, such as FHA and VA loans, offer low down payment options regardless of credit score, conventional loans typically require higher down payments for borrowers with lower credit scores.
  • A borrower with a 750+ score may only need a 3-5% down payment.
  • A borrower with a 600 score may be required to make a 10-20% down payment to offset risk.
• Private Mortgage Insurance (PMI): Borrowers with a credit score below 680 who put down less than 20% may be required to pay PMI, which increases the overall cost of the loan.

For real estate agents, guiding clients through these credit score implications can help them plan financially and explore options like credit improvement strategies before moving forward with a home purchase.

Factors That Influence a Credit Score

Credit scores are determined by several key factors, each carrying a different level of importance in calculating a borrower’s overall score. Understanding these factors helps borrowers take the right steps to build or maintain strong credit.

1. Payment History (35%)

Payment history is the single most influential factor in a credit score, accounting for 35% of the overall calculation. This category reflects how consistently a borrower makes payments on their debts, including credit cards, mortgages, auto loans, and student loans.

• Late or Missed Payments: A single late payment (30+ days overdue) can significantly lower a credit score, especially if the borrower previously had a high score. The longer the delinquency, the greater the impact.
• Severity of Late Payments: Payments that are 60 or 90+ days late have a more damaging effect than those that are only 30 days overdue.
• Bankruptcies, Foreclosures, and Charge-Offs: These major negative marks can cause drastic credit score drops and remain on a credit report for 7-10 years.
• Positive Payment History: Consistently making on-time payments builds a strong credit profile and signals to lenders that the borrower is reliable.

2. Credit Utilization Ratio (30%)

Credit utilization measures how much of a borrower’s available credit is being used. It is calculated by dividing total credit card balances by total credit limits.

• Ideal Utilization: Borrowers should aim to keep their credit utilization below 30%, as exceeding this threshold signals financial strain to lenders.
• High Utilization Penalty: A utilization rate above 50% can lower a credit score significantly, even if payments are made on time.
• Paying Down Balances: Reducing credit card balances before the statement closing date can lower utilization and boost scores.
• Low Utilization Benefits: Borrowers with credit utilization below 10% are seen as financially responsible and tend to have the highest credit scores.

3. Length of Credit History (15%)

The longer a borrower’s credit history, the better it reflects on their credit score. This factor considers the age of the oldest credit account, the average age of all accounts, and how long individual accounts have been open.

• Why Older Accounts Matter: Lenders view a longer credit history as a sign of stability and experience in managing credit.
• Closing Old Accounts Can Hurt Scores: Closing a long-standing account reduces the overall credit history length and can negatively impact scores.
• New Accounts Lower the Average Age: Opening multiple new accounts at once shortens the average credit history length and may temporarily lower scores.

4. Credit Mix (10%)

Having a diverse mix of credit accounts shows lenders that a borrower can handle different types of credit responsibly. Credit mix includes:

• Revolving Credit: Credit cards, retail store cards, and lines of credit.
• Installment Loans: Mortgages, auto loans, student loans, and personal loans.
• Open Accounts: Charge cards that must be paid in full each month.

Lenders prefer borrowers who successfully manage both revolving and installment credit, as this demonstrates financial versatility. However, opening new credit accounts just to improve credit mix is not recommended.

5. New Credit Inquiries (10%)

Whenever a borrower applies for new credit, the lender performs a hard inquiry on their credit report. Too many hard inquiries in a short period can lower a credit score.

• How Hard Inquiries Impact Scores: Each hard inquiry can lower a score by a few points. Multiple inquiries within a short timeframe suggest financial distress.
• Rate Shopping Exceptions: When applying for a mortgage, auto loan, or student loan, multiple inquiries within a 14-45 day window are typically treated as a single inquiry.
• Soft Inquiries: Checking your own credit report or being pre-approved for a loan does not affect your score.

How to Improve Your Credit Score

Improving a credit score takes time, but consistent financial habits can lead to significant gains. Real estate agents can help their clients by sharing these practical strategies.

1. Make Timely Payments

Since payment history is the most important credit factor, ensuring all bills are paid on time is essential.

• Set Up Auto-Pay or Reminders: Automating bill payments prevents missed due dates.
• Pay at Least the Minimum: If full payments aren’t possible, paying the minimum amount helps avoid late fees and credit score damage.
• Bring Delinquent Accounts Current: Catching up on past-due accounts stops further credit score declines.

2. Reduce Credit Utilization

Keeping credit utilization low can significantly boost a credit score.

• Pay Down Balances: Focus on paying off high-balance credit cards first.
• Increase Credit Limits: Requesting a higher credit limit from a lender (without increasing spending) lowers utilization.
• Make Multiple Payments Per Month: Paying off charges before the statement closing date prevents high utilization from being reported.

3. Avoid Opening Too Many New Accounts

While new credit can help in the long term, opening too many accounts at once can temporarily lower a credit score.

• Only Apply for Credit When Necessary: Avoid opening retail store cards or unnecessary credit accounts just for discounts.
• Space Out Applications: Waiting at least six months between credit applications helps prevent excessive hard inquiries.

4. Monitor Your Credit Report

Regularly checking credit reports helps borrowers spot errors and prevent identity theft.

• Obtain Free Credit Reports: Consumers can get a free credit report from AnnualCreditReport.com once per year from each of the three major credit bureaus (Equifax, Experian, TransUnion).
• Dispute Errors: Incorrect late payments, duplicate accounts, or fraudulent activity should be reported to the credit bureau for correction.
• Watch for Identity Theft: Unauthorized accounts or unfamiliar inquiries could indicate fraud.

5. Maintain a Diverse Credit Portfolio

A mix of credit types can positively impact a credit score, but borrowers should be cautious about taking on unnecessary debt.

• Consider Different Types of Credit: Managing both revolving credit (credit cards) and installment credit (loans, mortgages) shows lenders financial stability.
• Keep Older Accounts Open: Long-standing accounts contribute positively to credit history.
• Be Strategic with Credit Applications: Only apply for credit when it aligns with financial goals.

Frequently Asked Questions (FAQs)

1. What credit score is needed to buy a house?

A minimum of 620 is recommended for conventional loans, while FHA loans may accept scores as low as 580.

2. How fast can I improve my credit score?

Credit improvement depends on financial habits, but noticeable changes can happen within 3-6 months with disciplined actions.

3. Do late payments always affect credit scores?

Yes, but their impact lessens over time. Payments over 30 days late have the most impact.

4. Should I close old credit accounts to improve my score?

No, closing old accounts can shorten your credit history and lower your score.

5. How can real estate agents help homebuyers with credit issues?

By educating them on credit score importance, referring them to reputable credit counseling, and guiding them toward mortgage readiness.

Conclusion

Understanding what is a good credit score is crucial for homebuyers and real estate agents alike. A strong credit score leads to better mortgage rates, higher loan approvals, and overall financial stability. By taking steps to improve credit scores and working with knowledgeable real estate agents, aspiring homeowners can achieve their dream of homeownership with confidence.